BRARY OF CONGRESS. 



Chap* Copyright No... 

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UNITED STATES OF AMERICA. 



INTRODUCTION TO PUBLIC FINANCE 




•T^^v* 



INTRODUCTION 



TO 



PUBLIC FINANCE 



CARL C. PLEHN, Ph.D. 

ASSISTANT PROFESSOR IN THE UNIVERSITY OF 
CALIFORNIA 



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DUNOYER 



AUG ^61896 



Nefo gorfe 
THE MACMILLAN COMPANY 

LONDON: MACMILLAN & CO., Ltd. 

1896 

All rights reserved 



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Copyright, 1896, 
By THE MACMILLAN COMPANY. 



Nortoooti $reas 

J. S. Cushing & Co. — Berwick & Smith 
Norwood Mass. U.S.A. 



PREFACE 

This Introduction to Public Finance is intended to be 
an elementary text-book. It contains a simple outline 
of those things which are necessary to prepare the stu- 
dent for independent research ; a brief discussion of the 
leading principles that are generally accepted ; a state- 
ment of unsettled principles with the grounds for con- 
troversy; and sufficient references to easily accessible 
works and sources to enable the student to form some 
opinion for himself. The references that are given are 
not so much for the purpose of sustaining the author's 
statements, which any advanced student or teacher can 
easily trace to their sources, as to enable the beginner to 
add to his information on points that are of necessity 
briefly treated here. 

Both the American and the English systems of taxa- 
tion are badly in need of reform. Public opinion is 
gradually awakening to this need. Financial questions 
are widely discussed. There can be no doubt that the 
most pressing reforms of the close of the nineteenth 
century are tax reforms. The rapid extension of govern- 
mental functions — the invasion by the government of 
fields of activity that lie near to the welfare of the people 
— has given rise to great interest in the financial side of 



vi PREFACE 

these activities. It is hoped that this work may be help- 
ful in the accomplishment of these needed reforms. 

The Introduction to Public Finance can be intelli- 
gently studied by any person already familiar with the 
general principles of Political Economy. Technical 
details and wearisome tables of statistics have been 
avoided wherever possible. Abundant references to sta- 
tistical compilations are, however, given, so that such 
matters can be readily looked up if wanted. The coun- 
tries whose financial systems have been chiefly used to 
illustrate principles are England, Germany, Prance, and 
the United States ; other countries have been drawn 
upon only for particularly pertinent examples. A brief 
but complete history of the financial practices of the 
four countries named has been given. The countries 
most extensively studied are England and the United 
States. Although the book has been written from the 
point of view of an American, the author ventures the 
hope that it may not prove the less useful to English 
students. 

CARL C. PLEHN. 

Berkeley, Cal., August, 1896. 



TABLE OF CONTENTS 

INTRODUCTION 

Section 1. Definition, scientific character, and relations of Public 
Finance. Sec 2. History of the science. Sec 3. Method and 
subdivisions of the subject. Sec 4. Desirability and feasibility 
of a single method of classification throughout the whole sub- 
ject. Page 1 

PART I 

PUBLIC EXPENDITURE 

CHAPTER I 

The Nature of the State ; its Functions and their 
Classification 

Section 1. Political science sets no definite limits to the extension 
of State functions. Sec 2. Public Finance finds a limit in the 
revenue-yielding strength of the State. Sec 3. Public expendi- 
ture in early times. Sec 4. Public expenditure in Greece and 
Rome. Sec 5. Feudal expenditure and the beginnings of mod- 
ern. Sec 6. Classification of expenditure. Page 17 

CHAPTER II 

Expenditure exclusively for the Common Benefit 

Section 1. Expenditure for general administration. Sec 2. Ex- 
penditure for the legislative department. Sec 3. Expendi- 
ture for public buildings. Sec 4. Expenditure for defence. 
Sec 5. Expenditure for means of transportation. Sec 6. Ex- 
penditure for education. Sec 7. Assistance of private industry 
and commerce. Page 33 

vii 



viii CONTENTS 

CHAPTER III 

Expenditure for the Benefit of Individuals 

Section 1. Expenditure for charities. Sec. 2. Pensions. Sec. 3. 
Bounties and "protection." Sec. 4. Expenditure for the ad- 
ministration of justice. Sec. 5. "Betterment" of property. 
Sec. 6. Expenditure in public industries. Page 53 

PART II 

PUBLIC REVENUES 

CHAPTER I 

The Character and Classification of Public Revenues 

Section 1. Early forms of revenue. Sec. 2. The growth of con- 
stitutionalism results in uniformity of the revenue systems of 
the different countries. Sec. 3. Different States find the same 
justification of taxation. Sec. 4. Compulsion is universal. 
Sec. 5. Classification of revenues, definitions of fees, taxes, 
and prices. Secs. 6 and 7. Further considerations on classifi- 
cation. Page 69 

CHAPTER II 

The Classification of Taxes and Pees; Definitions 

Section 1. The measure of taxation distinguished from the justi- 
fication ; benefit theory and faculty theory. Sec. 2. Difficulties 
in the classification of taxes. Sec. 3. Direct and indirect taxes. 
Sec. 4. Taxes on persons, property, and income. Sec. 5. Other 
classifications of taxes. Sec. 6. Classification of fees. Sec. 7. 
Economic revenues. Sec. 8. Definitions of various terms used. 
Page 83 

CHAPTER III 

The Tax System 

Section 1. All nations use many different taxes; no single tax 
feasible. Sec. 2. What, in the opinion of nations, constitutes 



CONTENTS ix 

the ideal of correct or just taxation. The benefit theory • the 
legal theory in the United States. Sec. 3. The faculty theory ; 
what constitutes faculty. Sec 4. Other theories and progres- 
sion. Page 105 

CHAPTER IV 

The Development of Taxation before the Industrial 

Revolution 

Section 1. Feudal dues commuted, and voluntary contributions be- 
come taxes. Sec 2. History of taxation in France. Sec 3. 
History of Crown taxation in England. Sec 4. History of local 
taxation in England. Sec 5. Colonial taxation in America. 
Page 123 

CHAPTER V 

The Development of Tax Systems since the Industrial 

Revolution 

Section 1. The effect of the industrial and political revolution. 
Sec 2. General outline. Sec 3. Development of taxation in 
Prussia. Sec 4. In France. Sec 5. In England. Sec 6. In 
America. Page 144 

CHAPTER VI 

Excises 

Section 1. Comparison of excises and customs ; and direct con- 
sumption taxes. Sec 2. Purposes and principles of the ex- 
cises. Sec 3. Method of assessment. Sec 4. Typical excises. 
Sec 5. Proper field for excises. Page 169 

CHAPTER VII 

Customs Duties 

Sections 1 and 2. Customs duties defined. Secs. 3 and 4. The pur- 
poses of customs duties, both fiscal and political. Protective 
and revenue tariffs. Sec 5. The protective principle widely 
applied. Sec 6. The tax character of protective duties. Sec 7. 
Customs duties as a source of revenue. Sec 8. History of cus- 
toms duties in England. Sec 9. The German customs union 
and the Imperial tariffs. Sec 10. History of the French tariff. 
Sec 11. Tariff history of the United States. Page 182 



X CONTENTS 

CHAPTER VIII 

Property Taxes 

Part 1. The General Property Tax 

Section 1. Theory of general property tax and the objections to it 
based upon the experience of the United States. Sec. 2. Sci- 
entific judgment of the general property tax. Page 208 

Part 2. Special Property Taxes 

Sec 3. The land tax. Sec 4. Building tax. Sec 5. Taxation of 
capital. Sec 6. Inheritance tax. Page 219 

CHAPTER IX 

Personal Taxes 

Section 1. Poll tax. Sec 2. Theory of the income tax. Sec 3. 
Place of the income tax in the tax system. Sec. 4. Prussia 
income tax. Sec 5. The British property and income tax. 
Sec 6. Income taxes in the United States. Page 231 

CHAPTER X 

The Incidence of Taxation 

Section 1. Incidence depends upon the system ; meaning of shift- 
ing and incidence. Sec 2. Shifting may or may not defeat the 
purpose of the tax. Sec 3. Shifting adds to the burden of 
taxation. Sec 4. Shifting cannot take place when taxes are 
universal and equal. Sec 5. Incidence of excises and cus- 
toms. Sec 6. Incidence of the general property tax. Sec 7. 
Incidence of special property taxes and of personal taxes. 
Page 248 

CHAPTER IX 

Fees and Industrial Earnings 

Section 1. Connection between fees and industrial earnings ; 
development of fees into taxes. Sec 2. Judicial and legal 
fees. Sec 3. Administrative fees. Sec 4. Special assess- 
ments. Sec 5. Postal fees. Sec 6. Revenues from public 
property. Sec 7. Revenue from public industries. Page 259 



CONTENTS xi 

PAET III 

PUBLIC INDEBTEDNESS 

CHAPTER I 

The Growth and Nature of Public Credit 

Section 1. Size of public debts. Secs. 2 and 3. The nature of 
credit. Sec. 4. Wherein public credit differs from private. 
Sec. 5. Economic effects of public borrowing. Sec. 6. Foreign 
and domestic loans. Page 278 

CHAPTER II 

Forms of Public Debts 

Section 1. Funded and floating debts. Sec. 2. Forced and con- 
tractual loans. Sec. 3. Classification of debts. Sec. 4. "Per- 
petual " bonds and redeemable bonds. Sec. 5. Terminable 
annuities. Sec. 6. Lottery loans. Sec. 7. The rate of in- 
terest. Sec. 8. Debts of the treasury. Sec. 9. Productive 
loans. Page 293 

CHAPTER III 

Negotiation, Payment of Interest, Conversion, and Redemp- 
tion of Debts 

Section 1. Two chief methods of negotiating public loans. Sec. 2. 
Place of payment of interest, and other minor considerations. 
Sec. 3. Conversion of the debt. Sec. 4. Debt payment and 
the sinking fund in England. Sec. 5. Debt payment and the 
sinking fund in America. Sec. 6. Summary. Page 310 



xii CONTENTS 

PART IV 
FINANCIAL ADMINISTRATION 

CHAPTEE I 

The Budget ; Administration of Expenditure ; Control and 

Audit 

Section 1. Importance of sound methods of administration. 
Sec. 2. History of fiscal administration. Sec. 3. The budget 
in England, and appropriations in the United States. Sec. 4. 
English control and audit. Sec. 5. Control and audit in the 
United States. Page 325 

CHAPTER II 

Collection of the Revenues ; Custody of the Funds ; and 
the Public Accounts 

Section 1. Early methods of collecting revenues. Sec. 2. Collec- 
tion of customs duties and excises. Sec. 3. Assessment of 
direct taxes, "declaration," and equalisation. Sec. 4. Con- 
venience of the contributor must be consulted in the collection 
of taxes. Sec. 5. Transfer of the public funds and custody of 
the public moneys. Sec. 6. Public accounts in England and 
America. Sec. 7. "Funds of account." Page 340 

Brief Bibliography for Advanced Students. Page 354 

Index. Page 356 



INTRODUCTION TO PUBLIC FINANCE 



-<k>^K< 



INTRODUCTION 

Section 1. Public Finance deals with the way 
in which the State acquires and expends its means 
of subsistence. It stands in somewhat the same 
relation to the State that Political Economy stands 
to the individual. If Economics may be defined 
as the science which deals with the activity of 
the practical reason in acquiring and applying those 
things that are provided in comparatively limited 
quantities, for the satisfaction of the external and 
temporal wants of man, then, adapting our defi- 
nition to somewhat the same terminology, Public 
Finance may be defined as the science which deals 
with the activity of the statesman in 
obtaining and applying the material 
means necessary for fulfilling the proper functions 
of the State. 

Public Finance is properly called a science, be- 
cause, (1) it deals with a definite and D , 

' v y Properly 

limited field of human knowledge ; (2) called a sti- 
lt admits of an orderly arrangement 
of its facts and principles, and contains many 

B 1 



2 INTRODUCTION TO PUBLIC FINANCE 

laws of general progress belonging exclusively to 
its own field; (3) it admits of the application of 
scientific methods of investigation ; (4) it foresees 
as well as explains a certain class of phenomena; 
(5) it is generally, if not universally, so regarded. 
A dependent It is, however, a secondary or dependent 
science. science. It is closely related to two 

other sciences, upon which it properly depends. 
These are Political Economy and Political Science. 
While, on the one hand, it draws largely upon the 
conclusions of these two sciences for its hypotheses, 
yet on the other it contributes much to them. 
Most of the prominent German writers on the 
subject regard Public Finance as a corporate part 
of Political Economy. It is properly so regarded, 
because the activities of the State that belong 
to this field are of such a nature as to consume 
wealth, produce wealth, and to interfere with the 
distribution of wealth. From Political Science we 
shall have to borrow many conclusions as to the 
nature of the State, and as to the functions of 
government. A determination of what the proper 
functions of the State may be is no part of our 
subject, but belongs wholly to Political Science. 1 
In general it has been found best to assume 
that the functions now actually performed by the 
States are proper, provided they are not clearly 

1 For discussions of that part of the subject the reader is referred 
to Bluntschli's Theory of the State, Wilson's State, Hoffman's 
Sphere of the State, and Crane and Moses' Politics. 



INTR OD UC TION 3 

contrary to some generally accepted principles of 
Political Science. We are thns relieved of the 
bnrden, assumed by many writers on trie subject, 
of attacking or defending the actions of different 
governments in matters as to the propriety of 
which there is some question : for example, the 
propriety of the continuance or assumption of 
State ownership of railroads, or the State monop- 
oly of tobacco. All such matters will be treated 
purely from the fiscal point of view. 

Information concerning the facts with which the 
science of Public Finance deals can, in most in- 
stances, be definitely ascertained, and „,, 

' J The Art of 

the conclusions drawn have often a Public Fi- 
sharpness and distinctness lacking in nance - 
many other parts of Political Economy and Po- 
litical Science. There is, consequently, the tempta- 
tion to create the corresponding Art of Public 
Finance. For when any science becomes at all 
"exact," it is easy and often desirable to point out 
possible direct applications of the truths learned. 
But although it is of the utmost importance that 
statesmen should be guided in their actions by cor- 
rect principles, it is in no sense the duty of the 
scientist, as such, to make the application of the 
laws he may learn. Scientific investigation should 
precede, and ever remain independent of, any pos- 
sible use of the truths discovered. In no other 
way than by the search for truth for its own sake, 
can we obtain absolute clearness of view. 



4 INTRODUCTION TO PUBIIC FINANCE 

Sec. 2. Public Finance, as a science, is older than 
Political Economy. Indeed, it is not incorrect to say 

Older than *kat ^ was ^ ie ^ orerunner of both the 
Political sciences to which it is now tributary. 

For the writings of the Cameralists dealt 
more fully with this part of the field of Political 
Economy than with any other. Public Finance as 
an art, and as the subject of more or less conscious 
study, necessarily arose as soon as there was a dis- 
tinct separation between the income of the Gov- 
ernment, or the State as such, and the income of 
the Prince : — that is, as soon as any direct levy was 
made upon the wealth of the citizens, or any prop- 
erty administered, to secure a revenue for an ac- 
knowledged public purpose broader than the mere 
support of the Prince's household. The necessity 
for officials properly trained to administer the vast 
princely and public revenues that flowed into the 
public coffers led to extensive studies in just this 
line ; and then the investigation into the origin and 
causes of the wealth of nations, as the foundation 
and source of public revenues, was the step which 
led to the birth of the greater science. 

The writers on the Cameralistic science (which, 
because it at first embraced but little more than 
the matter now included in Public Finance, may 
be properly claimed as our science under another 
name) were stronger in Germany than elsewhere. 1 

1 For an account of them see Koscher, Geschichte der National 
Oekonomie in Deutschland. 



INTRODUCTION 5 

On this account the science has always had a 
stronger hold there than in France or England. 
In those countries the lead of the Phys- only parts of 
iocratic doctrine, the powerful influ- the subject 
ence of Adam Smith, and, after his English 
time, the intensity and rapidity of in- writers. 
dustrial development, directed the attention of stu- 
dents in such fields to the more general and more 
absorbing questions. Although Adam Smith him- 
self devotes one book to the discussion of finance, 
and other writers of note give it passing attention, it 
was extremely slow in obtaining independent recog- 
nition. The predominance in both England and 
France of a theory of State which minimised the 
importance of government action may in part ac- 
count for this neglect. The one part of the sub- 
ject that did receive attention — namely, taxation — 
dealt with an activity that was admittedly neces- 
sary. But other fields, like that of expenditure, 
were comparatively neglected. The same blind- 
ness which led English economists to underrate the 
importance of a study of consumption, except so 
far as it led to new production, prevented them 
from seeing anything worth studying in State ex- 
penditure beyond, possibly, its effect on new rev- 
enues. Hence it is that while Germany piled 
treatise on treatise, all deep, scholarly, and broad, 
covering the whole subject of Public Finance, we 
have had to wait until 1892 for a systematic treat- 
ment of the whole field in the English language, 



6 INTRODUCTION TO PUBLIC FINANCE 

and we still await such a one in French. 1 It 
must not be understood that portions of the sub- 
ject were not investigated. There are, on the 
contrary, many important works on the various 
parts of the science. But what was entirely lack- 
ing until the appearance of Bastable's Public Fi- 
nance, in 1892, was an attempt to systematise the 
whole subject. 

Financial problems are becoming more important, 
because the functions of government which depend 
m , . on them have grown in importance and 

The recent & r 

growth of number. Our industrial, commercial, 
and social organisation has become more 
and more complex, and it hence requires better and 
more effective governmental organisation to keep it 
running smoothly. The more important it becomes 
to perfect our governmental organisation, the more 
do questions affecting the supply and application of 
material support rise into prominence. Whether 
we regard the constant expansion of the State's 
activities with favour or disfavour, it is equally 
important that the financial problems arising from 
these activities should be solved. Accordingly Pro- 
fessor Bastable's work has been followed by a flood 
of special articles, by the announcement of a treatise 
by Professor H. C. Adams, and by a translation of 
some of Professor Cohn's published writings on the 
subject. 

1 Leroy-Beaulieu, however, covers all but expenditure in a 
masterly manner. 



INTR ODUC TION 7 

Sec. 3. On account of the close relation exist- 
ing between Public Finance and Political Economy, 
most of the discussions as to the proper The same 
method for the latter bear with equal methods avail- 
force upon the former. 1 But the nature political 
of the materials with which Public Fi- Economy. 
nance deals is such that in general the inductive 
method has a wider possible scope, and the deduc- 
tive a narrower field than in the larger science. 
The historical and comparative method is most ser- 
viceable for ascertaining the conditions under which 
different kinds of taxation work. The general ef- 
fects of taxation, its shifting and incidence, the 
effect of expenditure and public debts, can be best 
studied deductively. The deductions in this case 
are derived from the conclusions reached by the 
previous method, and from principles derived from 
Political Economy. Inasmuch as the purpose of 
the present book is merely to expound principles 
already determined by the science and to use the 
facts of financial practice rather as illustration than 
as proof of the doctrines advanced, it will not be 
necessary to acquaint the reader, in each case, with 
the method used to ascertain the truths stated. 
In the main, therefore, we shall follow what has 
been aptly called the method of instruction, which 
is in a sense an inverted induction, in which the 
principle is first stated and then sufficient facts are 
adduced to show that the principle is true. 

1 Cf . Keynes' Scope and Method of Political Economy. 



A 



8 INTRODUCTION TO PUBLIC* FINANCE 

The subject falls naturally into four parts: (1) 
Public Expenditure, (2) Public Revenue, (3) Pub- 
Divisiono/the lie Debts, (4) Financial Administration. 
subject. of these, Public Expenditure and Fi- 

nancial Administration have, until recently, not 
been the subject of important works in the Eng- 
lish language, and, therefore, a few words in de- 
fence of their incorporation are necessary. Public 
Expenditure is as much a part of Public Finance as 
Consumption is of Political Economy. While it 
belongs peculiarly to Political Science to determine 
what the lines of expenditure shall be, just as it 
belongs to Ethics to teach the individual in what 
direction he should use his wealth, yet, when the 
lines of expenditure have been determined, its form, 
amount, and effect belong to Public Finance, just 
as the form, amount, and effect of consumption be- 
long to Political Economy. Consumption, or the 
satisfaction of wants, is the end and aim of all 
production and distribution. So is expenditure the 
end and aim of the collection of revenues and of the 
other financial activities of the statesman. To ex- 
clude, at least, a statement of the forms and the cus- 
tomarv direction of expenditure would 

Expenditure J L 

should be be to overlook the purpose of all the 
included. regt> But there ig stm anot her consid- 

eration that emphasises the need of a statement of 
the general objects of expenditure. The amount 
of expenditure is generally determined first, and 
after that has been settled the required revenue 



* INTRODUCTION 9 

is obtained. In this Public Finance differs mate- 
rially from Political Economy. In the broader 
science it is generally assumed that the individual 
cannot regulate his income by his wants, but must 
limit his wants to his income. In some cases this 
difference fades away. Cities often have to forego, 
temporarily at least, desirable improvements on ac- 
count of the increased burden they would impose on 
the finances. But in general we find that the mod- 
ern State is quite as likely to neglect some important 
and desirable function which it could perform, as to 
increase its functions beyond what would be wise. 1 
If this is true, and that it is so will be seen in the 
course of the discussion, then it would be well to 
ascertain the main features of expenditure at the 
outset. But we are not obliged to justify or con- 
demn the different lines of expenditure that are 
deemed by the leading nations to be wise or 
expedient. 2 

1 Cf. Cohn, Finanzwissenschaft, p. 183. 

2 Another strong objection to entering into a discussion of 
the advisability of the different lines of expenditure, has been 
mentioned above in the paragraph showing that Public Finance 
should be studied as a science and not as an art. If we discuss 
whether certain expenditures ought to be made, or should be 
enlarged, or curtailed, we are leaving the safe scientific ground of 
what is or will be. The danger of thus falling from the high plane 
of scientific impartiality to the level of political wrangling is fre- 
quently illustrated by the work of Leroy-Beaulieu. Bastable's 
work, although saved from anything like a similar failure by the 
author's masterly ability to defend his position, is yet certainly 
marred by too frequent judgments concerning the advisability of 
existing features of fiscal practice. 



/ i 



10 INTRODUCTION TO PUBLIC FINANCE 

Financial Administration is properly regarded as 
the fourth division of the subject, because it is as 
necessary to know how a State gets its revenues as to 
know whence it gets them and for what it spends 
them. This department, too, deals with a large num- 
ber of technical details which would only cumber 
the other parts if taken up in connection with them. 

Of the four divisions, Public Revenue is necessarily 
, T 7 , the largest : probably for reasons akin 

Needed re- ° x J 

forms make to those that influenced previous Eng- 
u ic eve- jj k wr iters to give taxation their ex- 

nue the most ° 

important elusive attention. It is here that the 
par ' most urgent reforms belong, and hence 

the need of understanding existing conditions is 
most pressing. 

The distribution of the various financial activities 
among the different divisions of the government, 
federal, national, or local, will be noted in connection 
with the discussion of each part of the subject. 

Sec. 4. The continued lack of any systematic 
treatise on the subject has left classification in a 
Uniform most chaotic state. From the point of 

method of view of form, merely, this is the most seri- 

clctS SZ fxCCLtZOTL 

for all parts ous defect in Bastable's pioneer treatise 
of the subject. on ^he su bject. It lacks uniformity in 
the methods of classification. In the present work 
the attempt has been made to use the same method 
of classification from beginning to end. It is that 
suggested by Professor Cohn for all public charges, 
and afterwards developed in a somewhat different 



INTR OD UC TION 1 1 

way by Professor Seligman. 1 The charges made by 
the government upon individuals vary in character 
according as the special benefit conferred upon the 
individual is made the exact or the partial measure 
of, or is not allowed to affect at all, the burden im- 
posed upon him. Public Revenues and Public Debts 
have already been classified in this way, and it is very 
easy to classify Public Expenditure and Administra- 
tion in the same way. 

The nature of this classification and its appli- 
cability to the whole subject may be explained by 
reference to the well-known customs of ~, . 

The nature of 

our large athletic clubs. For member- this ciassifica- 
ship, and the usual privileges of the club, t * on \ T~ , h 
each member is assessed the same sum, practice of 
irrespective of the actual extent to which athletic duhs ' 
he uses the club, and without reference to his ability 
to pay, that being assumed for this purpose to be 
equal to that of every other member, and certainly 
without reference to any known ability to pay more. 
This fee is justified by the common benefit con- 
ferred. If, however, the member makes use of the 
dining-room, or asks for special privileges such as 
the private use of the club quarters, grounds, boats, 
appliances, etc., he pays an additional sum, meas- 
ured, generally speaking, by the special benefit con- 

1 Cohn, Finanzwissenschaft, pp. 104-118, esp. pp. 117, 118; 

Seligman, Quarterly Journal of Economics, May, 1892 and 1895. 

Hints of the same classifications are found in Malclius and Hoff- 
man. 



/ / 



12 INTRODUCTION TO PUBLIC FINANCE 

f erred upon him. Again, if the club is in debt, or 
proposes to enlarge its facilities, not infrequently 
a subscription paper is passed around and each 
member is urged to contribute, not the same amount 
all others have subscribed, nor yet in proportion to 
the use he makes of the club, but " as much as lie 
is able." And lastly, there are not infrequently 
cases where poor but promising athletes have been 
admitted, in order that the club may have the glory 
of their prowess, and have been excused from dues. 

Now there is an almost perfect analogy between 
such a club and the State in respect to the con- 
tributions demanded, the benefits conferred, and 
the method of operation. Generally speaking, the 
State endeavours, in collecting revenues, to impose 
an equal 1 burden upon all for the support of those 
functions that are regarded as conferring a common 
benefit, and a special burden for the support of 
those activities which confer a special benefit, and 
under certain circumstances to increase the burden 
imposed upon the very wealthy, who are regarded as 
able to bear more ; and lastly, to tax all for the 
support of the poor. Not that the State always 
succeeds in its endeavour, nor that all States recog- 
nise equally the desirability of the attempt; for 
in Public Finance expediency necessarily plays a 
large part. But most States have come to recog- 
nise more or less clearly these ideals, and their 
policy can be conveniently summarised in this way. 
1 What is meant by " equal " will be discussed later. 



INTR OD UC TION 1 3 

The various activities of the State can be 
easily classified, according to the degree of common 
or special benefit they are supposed to state activi- 
confer upon the citizens, or tax -payers. ties con M 

C077111X07I bene- 

The various groups shade into one an- fit or special 
other, of course. But the extremes are bene fit- 
perfectly clear and fundamentally different. Thus, 
it is universally admitted that the functions of the 
general administrative and legislative departments 
are of such a character as to give a common benefit, 
for which, ideally, every one should pay according 
to some scheme of supposed equality. But at the 
other extreme there are many things done by the 
State which confer so special a benefit as to justify 
a special charge. For example, when the State 
carries a passenger or a box of freight over its rail- 
road, or carries a letter, or provides the citizens 
with china or tobacco, it confers a special benefit. 
Between these two extremes there are any number 
of grades, according as the predominant thought is 
that of common or special benefit, when both ideas 
are present. But there is one more consideration 
that must be introduced. There are a certain num- 
ber of State activities which it is in the interest of 
the whole to have performed, but which accrue to 
the special benefit of certain classes, who on account 
of poverty are unable to pay for that benefit; and 
if the State is to perform these functions, it must 
call upon the other classes for assistance, excusing 
the poorer. Theoretically, the support of the poor 






14 INTRODUCTION TO PUBLIC FINANCE 

and defective classes is an activity conferring a 
common benefit upon all the other members of 
society, and hence they are called upon to contribute 
accordingly. If we consider it the moral duty of 
society as a whole to help the weak, then the relief 
of the poor confers a common benefit. It is the same 
if we look upon poor relief from a less altruistic point 
of view, and consider that society is merely protect- 
ing its own interest, as, for example, in isolating the 
feeble-minded, so that they shall not propagate their 
weakness. Without going farther into details, which 
will receive attention later in the book, it is now clear 
that this method provides a feasible way of classif}- 
ing public activities and public revenues. When 
we once have a satisfactory classification of revenues, 
it is easy to classify debts, inasmuch as they rest 
upon the revenues. The administrative features of 
the financial bureaux will fall naturally into place 
also. 

A single method of classification, therefore, will 

pervade the work from beginning to end. The 

classification will help us to get at the economic 

. , . features of expenditure, reveal the iusti- 

Advantages of r J 

this classified- fication and measure of taxation, and 
show us the essential character of each 
kind of public debt; namely, the kind of credit 
upon which it is based. 

It must not be understood that the assignment of 
any activity to a particular group is permanent. 
Activities that were once regarded as conferring 



INTRODUCTION 15 

special benefit — as, for example, a large part of the 
administration of justice — come in time to be re- 
garded as of common benefit. Such changes often 
proceed with rapidity, and the stages are not passed 
through synchronously by all States. 

J. ttxi (J LC tt tttXG 

There are, for example, many cities which toward public 
let private individuals provide the water a f wlties 

r *- changes. A 

supply. Others provide it themselves, general move- 
on precisely the same terms as indi- 7}ienttowa ^ d 

r J the idea of 

viduals would, while others provide it common bene- 

much as they do other special privileges, **' 

regarded as conferring both special and common 

benefits; and very probably the time is near when 

most large cities will regard it quite as much a 

matter of common benefit to provide each and 

every citizen with at least a certain amount of 

water at the cost of the general taxes, as they now 

regard it a matter of common benefit to dispose of 

the sewage, a function which was once considered 

the duty of each citizen, and is still so regarded in 

many cities. But however mutable our classes may 

be, they are clearly discernible, and it is generally 

only by slow degrees that we find cities proceeding 

from one end to the other of the systematic grouping. 

While there seem to be general tendencies, which 

transfer all activities from the special some activi- 

benefit to the common benefit plan, there ties cease t0 be 

regarded as of 

are a lew exceptional cases where the common bene- 

movement is the other way. The support fi u 

of religion is such an instance. Originally almost 



16 INTRODUCTION TO PUBLIC FINANCE 

the sole object of State expenditure, this has now, 
after passing through various ups and downs, come 
to be regarded as of such special benefit that it is 
being gradually excluded from the sphere of the 
State, and left to private support. 



PART I 

PUBLIC EXPENDITURE 



CHAPTER I 

THE NATURE OF THE STATE, ITS FUNCTIONS AND 
THEIR CLASSIFICATION 

Section 1. The State is the centre of Public 
Finance. The State requires money and services 
for the performance of its functions. The first 
question is what is the nature of the State, and what 
are its functions ? To answer this we shall have to 
borrow a little from Political Science. The best 
recent authorities on Political Science seem to an- 
swer the question, " What is the State ? " with a 
more or less expanded but not essentially modified 
restatement of Aristotle's famous dictum : " It is 
manifest that the State is one of the things that 
exist by nature, and that man is by nature a political 
animal." The State is an organism into j^ e state an 
which the individual is born, and through organism. 
which alone he can hope to reach his highest devel- 
opment. Upon its existence, and the perfection with 
which it performs its functions, depends the degree 
c 17 



18 INTRODUCTION TO PUBLIC FINANCE parti 

of social organisation possible. The State seems to 
be God-given to enable society to organise on a grand 
scale for the accomplishment of practical ends far 
beyond the reach of the individual, — ends upon 
which the welfare of the individual depends. 1 

The two opposing theories as to the proper sphere 
of the State, Individualism and Socialism, stand for 
two grand truths. The one for the truth that the 
individual, if he is to accomplish his manifest des- 
tiny, must be allowed or assured room enough for 
the free exercise of his powers so as to develop them, 
T ,. ' . , 7 . and to expand. Such individual devel- 

Individuahsm ■*■ 

and Socialism opment is necessary for the advance of 
reconcilable. society> The sec0 nd, that the State 

affords the individual the surest means of obtaining 
the assistance of his fellows, so necessary to his own 
complete manhood. The way of reconciling these 
two theories is pointed out in the Christian doctrine 
that true freedom consists in perfect obedience to 
the law. Anything short of perfect obedience to the 
highest law is failure to attain the Jiighest freedom. 

The constant intrusion of the State on fields of 
The extension activity previously given to the individ- 
; tate J unc - ua i i s a natural result of the constant 

twns not justi- 
fiable a priori, increase in the separation of employ- 
ments, necessitating more extensive organisation. 
As the individual becomes more and more depend- 

1 Cf . Kidd, Social Evolution ; for detailed analysis of the nature 
of important modern states see Burgess, Political Science and 
Comparative Constitutional Law. 



chap. I THE NATURE OE THE STATE 19 

ent for the completeness of his own life on his 
fellows and their faithful performance of the duties 
assigned to them, the organisation of the State be- 
comes correspondingly more perfect. As regards this 
increasing importance of organisation, the following 
will fairly summarise the practice of advanced na- 
tions. It is impossible to approve on a priori grounds 
of every intrusion of the State into fields hitherto 
set aside for the individual. Only when such in- 
trusion does not lessen individual power, energy, 
ambition, and ability to advance, is it permitted. 
And only when it promises definitely to increase the 
importance of the individual, in the long run, is it 
desirable. The burden of proof is therefore in each 
concrete case thrown upon the persons who would 
have the State advance into new fields. There is no 
absolute limit to, but only a general presumption 
against, the assumption of new functions by the 
State. 

Sec. 2. If Political Science cannot in the nature 
of things give us any definite, theoretical limits to 
the expansion or the contraction of State functions, 
can such limits be found in Public Finance ? If the 
common statement that " the State regu- 

' . J , ,., , Does Public 

lates its income by its expenditure and Finance set 
not its expenditure by its income " is am J limit t0 

, . . the possible 

altogether true, there can be no limit set eximns i 0n 
by Public Finance to the possible expan- of state 

activities? 

sion oi btate functions. But there are 

as a matter of fact many important exceptions recog- 



20 INTRODUCTION TO PUBLIC FINANCE part i 

nised. 1 Those exceptions are : (1) that statesmen 
in deciding as to the advisability of any new expen- 
diture necessarily consider the amount of burden it 
will impose on the tax-payers. The expansion of 
municipal activities in the last twenty-five years has 
been so rapid that at present any further expansion 
is, in many instances, at least temporarily checked 
by the difficulties in the way of meeting the cost. 
(2) There are some instances where for political 
reasons income has outrun what was regarded as wise 
expenditure and new ways of spending have had to 
be devised. This is a decidedly more unfortunate 
state of affairs than the other, for such forced expen- 
diture seldom takes a wise direction. Witness the 
wholesale plundering of the United States treasury 
for pensions. (3) Expenditures may sometimes rise 
very rapidly, and necessarily so, at a time when it 
would be extremely unwise to attempt to increase 
the revenues. At such times the practice of nations, 
— a practice that has proven itself wise, — has been 
to let expenditure run beyond the income and borrow 
the difference. 

One of the prime requisites of a good system of 
public revenues is that the sums taken from the 
A limit set by people each year in the various ways 

the requisite ghaU be ^ ^^ ftg ogsible> The 
of steadiness J r 

in revenues, reason for this will be made clear under 

the general consideration of revenue. That fact, 

however, forbids our determining the annual reve- 

1 Cf. Bastable, p. 42 ; Wagner, I., sec. 11. 



chap, i THE NATURE OF THE STATE 21 

nues absolutely by the annual expenditures. The 
general practice of nations is to increase expendi- 
ture, (a) when it is absolutely necessary, (6) if not 
absolutely necessary, when it offers advantages which 
more than compensate for the increased burden on 
the revenues. The experience of nations has also 
shown that it is universally better to „ 

J Practice of 

do the public business, if expenses are nations recog- 
increasing rapidly, on a deficit rather mses a hnnL 
than on a surplus. If expenses are for a consider- 
able period quite uniform, the usual policy is to 
keep the revenues, as nearly as possible, equal to 
them, but not in excess of them, and when expenses 
can for some reason be lessened, some of the reve- 
nues may be applied to the amortisation of accumu- 
lated deficits. It would seem, then, that steadiness 
of revenue is treated as the more important consid- 
eration. Herein lies a limit, but not an absolutely 
fixed one, to the expansion of expenditure and of 
State functions. 

To sum up : the general character of public ex- 
penditure, especially as to whether imperative or 
not, as well as to its particular direction, summary of 
will depend primarily upon considera- the ^gument 

cts to tJ) 6 linii— 

tions which belong to Political Science, tation of state 
Its amount will depend on the revenue- functions. 
yielding strength of the State, and upon the effect 
which such expenditure will have thereon. The 
danger made so much of by some writers 2 lest, 
1 Roschcr, sec. 109. 



22 INTRODUCTION TO PUBIIC FINANCE part i 

revenues being obtainable by compulsion, that com- 
pulsion be exercised for the benefit of interested 
persons, who gain particularly by the increased 
spending, is in a democracy replaced by the corre- 
sponding danger lest too meagre supplies be granted 
by the voters who must themselves pay the larger 
part of the revenues, and advisable or even neces- 
sary lines of expenditure be omitted or seriously 
curtailed. 

Sec. 3. Expenditure, like every other feature of 
Public Finance, changed radically in character and 
direction during the eighteenth century. Therefore, 
before proceeding to analyse present expenditure, 
we shall do well to take a brief survey of expendi- 
ture before this century. In the early stages of State 
life the forms of property were few, public life was 
identified with the family and with religious life. 
_ ... There was little call for definite public 

Public ex- L 

penditure in expenditure. The chief item was for 
early times. religious observances, and for these pur- 
poses only was there a distinct public treasury. 
Foundations for the support of religious observ- 
ances, as seen in Greece and Rome, are extremely 
old. The temples have their own groves, lands, 
mines, and flocks, receive contributions, and exact 
a tariff for their services. Materials for the study 
of this period are scant. Services of a public char- 
acter are performed by all citizens as a matter of 
course. In war they are the warriors, they furnish 
their own arms. Their reward is in the success of 



CHAr. i THE NATURE OF THE STATE 23 

their enterprise. By mutual effort, or the slave 
labour of conquered peoples, they build their fortress- 
cities, ships, roads, and temples. The simplicity of 
economic life forbids the rise of any proper system 
of public revenues. Taxes are levied on conquered 
peoples, but the free citizen is exempt. There is 
practically no division of labour in State matters 
which would call for a paid public service. Greece 
and Rome emerge from these primitive forms with 
a more complicated system of expenditure, but with 
relatively little advance in revenues. 

Sec. 4. In Athens we find a highly developed 
system of expenditures, almost communistic in char- 
acter, and greater than that of other Athenian ex- 
nations of Greece on account of the penditure. 
sources upon which the city treasury might draw 
and the peculiar circumstances in which the city 
was placed. 1 The expenditure for public buildings 
and public works was particularly large, as were 
the extravagances of public festivals and sacrifices, 
of donations to the people, compensations for at- 
tending the assemblies, and the like. Peculiar to 
Athens, among all the nations of that era, was the 
assistance rendered at the public expense to the 
poor and especially to the children of those fallen 
in war. Regular expenditures are said to have 
varied from 400 to 1000 talents, or from $410,400 
to $1,026,000. Extraordinary expenses in time of 

1 The outline in the text is necessarily very brief ; for a longer 
account see Boeckh, The Public Economy of the Athenians. 



24 INTRODUCTION TO PUBLIC FINANCE part i 

war were relatively small on account of the rendi- 
tion of voluntary services by the citizens. 

In Rome there was no distinct public budget in 
the earlier days of the republic. 1 The public 
wealth was not distinct from the private wealth 
of the citizens. With the increase of the prov- 
Expenditure hices and the receipt of tribute from 
in Rome. them came regular methods of public 

expenditure. The items directly borne by the 
State were the cost of the priesthood, of buildings 
and other structures and roads, of the army, of the 
general administration, and of the distributions of 
food, grain for the city population, donations of 
money, oil, and wine. The army was first paid 
in 406 B.C. But for a long time afterward the 
remuneration amounted to little more than the re- 
imbursement of expenses. At first the Emperor 
was supposed to live from his own private prop- 
erty, but as he had control of all the public rev- 
enues, the distinction was difficult to maintain. 
The later courts were extremely extravagant. 

Greek, and especially Roman, expenditure had 
many features similar to modern expenditure. In 
classic civilisation, division of labour was suffi- 
ciently developed to render possible the pay- 
Divisionof ment of those who devoted all their 

labour and ^ and en to bHc affairs< g t 

public expen- OJ 1 

diture. continuity of development is lacking. 

From the fall of Rome to the rise of feudalism 

1 See Marquardt, Bomische Staatsverwaltung, Bd. II. 



chap, i THE NATURE OF THE STATE 25 

there is a reversion to the earlier forms of pub- 
lic life. Public expenditure is not separable from 
private. The citizen serves the State without re- 
muneration, and there are no public expenses proper. 
Sec. 5. It is the essence of feudalism that all 
governmental functions are placed in the hands of 
officials who are given the possession of lands which 
yield the necessary revenues for the execution of 
those duties. At the same time the relation be- 
tween these rulers and the people is such that ser- 
vices can be commanded for public purposes without 
distinct remuneration. The undeveloped condition 
of commerce and industry necessitates that public 
contributions shall be in products and in Feudal ex- 
services. The chief duties of a public penditure. 
character that are performed hy these semi-public of- 
ficials are the organisation and leadership of military 
operations and the crude administration of justice. 
Of administrative functions in our modern sense 
there are scarcely any. The public funds are so 
entirely under the control of the prince that he 
comes to regard them as his own. At the same 
time the various subordinate lords, who were origi- 
nally officers of the crown and who received lands 
for the purpose of supporting them in their offices, 
succeed in retaining possession of the lands and 
other rights and privileges, although neglecting the 
duties for which they were given. As the monarchi- 
cal State emerges from feudalism there is the same 
complete identification of the public purse with the 



26 INTRODUCTION TO PUBIIC FINANCE parti 

private purse of the monarch, as there was of the 
State with the person of the monarch. And this, 
too, although a good share of the revenues are now 
derived from taxation. Expenditure is for the grati- 
fication of the prince, and so far as he sees that his 
interest is the same as that of his people he spends 
for them. 

The advance of constitutional forms of government 
is everywhere characterised by constant successful 
Constitutional attempts on the part of the representa- 
forms of gov- tives of the people, or of those who con- 
change the tribute to the public purse to get control 
control of ex- f the finances. Constitutionalism ad- 

penditure and 

consequently vances just as fast as it succeeds m this 
Us character, attempt. At present the control of the 
purse is entirely in the hands of the constitutional 
legislative bodies in almost all countries, and the 
domains of the prince, which were originally given 
him by the people in order that he might be sup- 
ported in proper dignity in the performance of his 
public duties, and were then diverted by him to 
his private enjoyment, have been regained by those 
who gave them, and are in most States once more 
public property. The expenditure for the support 
of the crown now becomes one of the chief items on the 
civil list. The final establishment of constitutional 
government has introduced a new criterion for judg- 
ing public expenditure. An expenditure is no longer 
a justifiable one when it gratifies the whim of the 
ruler or of the governing body, but it must result in 



chap, i THE NATURE OF THE STATE 27 

some clear benefit to the people as a whole, or to 
the nation, or in a benefit that is so regarded ; 
otherwise it will not continuously meet with the 
popular approval which is now necessary to sanction 
every governmental action. 

Sec. 6. Many attempts have been made to clas- 
sify public expenditures, and often with good results. 
The most common are those which follow more or 
less closely the usual economic analysis of private ex- 
penditure, according as the wants satisfied are neces- 
sary, desirable, or superfluous. The use Necessanj, 

£ , ,i • i i desirable, or 

oi economic terms in this way is to be „ 

J superfluous 

commended, but as in Economics, so expenditure. 
here, the vagueness and relativity of these terms 
are very unsatisfactory. Different writers do not 
agree as to what are necessaries, even for the same 
State. After all, the assignment of any particular 
expenditure to one or the other of these categories 
is merely the expression of the author's individual 
judgment on the expenditure in question. 1 This 
savours too much of the art of Public Finance for 
a scientist. Professor Bastable, after pointing out 
this very difficulty, proceeds to make a classification 
based on the order of historical rise of the different 
functions, or perhaps it would more Bastable' s 
nearly reproduce his thought to say classification. 
that he tries to establish historically a sort of natu- 
ral evolution or sequence of public expenditures. 
The difficulties he encounters, in the search for such 
1 Cf. Bastable, p. 43. 



28 INTRODUCTION TO PUB II C FINANCE parti 

a sequence, are so great that the results are not par- 
ticularly clear and not at all convincing. The diffi- 
culties arise from the fact that such a process merely 
substitutes for the author's judgment, on which the 
older classifications rest, the judgment of the leaders 
of national policy at different times and in different 
places on the same questions ; namely, are these ex- 
penses necessary or merely expedient ? He certainly 
gains much by substituting the point of view of past 
statesmen for that of any present person or persons. 
But it will be a still greater gain if we can eliminate 
the personal element entirely and make a classifica- 
tion that does not depend upon the way in which 
the desirability or undesirability of the different 
functions is regarded. The important thing in 
Public Finance is not to ascertain whether or no 
certain functions are to be approved or not. 

Such an analysis as we are in search of has been 

suggested by Professor Colin, 1 which he has well 

Cohn's eco- called the " economic analysis of civic 

, .-. housekeeping. Inere are according 1 to 

cation of civic x & o 

housekeeping, this suggestion four groups. The first 
consists of those functions which confer so definite a 
benefit upon the individual, and are so clearly per- 
formed solely for the benefit of the individual, that 
he would naturally be expected to meet the cost of 
them. The second group consists of those functions 
which confer a common benefit upon all members of 
the State, of such a character that it cannot be par- 
1 Finanzwissenschaft, p. 117. 



chap, i THE NATURE OF THE STATE 29 

celled out and each portion definitely assigned to 
the respective members. This group embraces the 
prime functions of the fundamental institutions of 
the State. These are the two extremes. Between 
them are two more groups. The third consists of 
those functions which confer a special benefit that 
might be separately assigned to particular persons, 
but in which such assignment is wholly or partly 
waived, because there is also sufficient common 
benefit to justify making such functions a total or 
partial charge on the general ability. Finally, a 
fourth group, which consists of those functions that 
confer a special benefit on certain individuals more 
or less unable to assist in bearing the charges, and 
which are consequently treated as though they con- 
ferred a common benefit upon all the members of 
society. 

Dropping, for the present, all consideration of 
the ways in which the benefit is meas- m 

J m The four 

ured, which will be fully discussed classes ofex- 
under the head of revenue, and re- P endlt ™' es 

according to 

arranging the groups in the order of the benefit con- 
their importance, we have the following ^ erre ' 
four classes of expenditures : 

First, the largest and most important, those which 
confer a common benefit on all citizens. 

Second, those which confer a special benefit on 
certain classes that is treated as a common benefit, 
because of the incapacity of these classes. 

Third, those which confer both a special benefit 



30 INTRODUCTION TO PUBLIC FINANCE parti 

on certain persons and a common benefit on all 
the others. 

Fourth, those which confer only a special benefit 
on individuals. 

Under the first of these come the general expendi- 
tures for the support of the constitutional agencies 
of the government. The support of the 
longing to administrative and legislative depart- 
each class. men t s , in almost all their branches, in- 
cluding the diplomatic corps, and everything neces- 
sary thereto, as public buildings, etc. Here, too, 
belong the support of defence and the maintenance 
of internal security and quiet. Here belong, ac- 
cording to modern practice, the maintenance of 
roads, although it was once treated as belonging 
to class four, and passed through a transition stage 
in class three. Under this class belong, also, the 
chief expenses in connection with the maintenance 
of the money circulation, although a part of this 
expenditure is in most countries to be assigned to 
class three. 1 The same is to be said of the ex- 
penditure for education. Here belong the adminis- 
trative control and assistance of private industry 
and commerce. 

Under class two belong the care of the poor 
and the defective. Also the support of the pen- 
sioned, unless pensions are such that they may be 
regarded as unpaid wages, in which case they belong 
to the first class. 

1 The United States once charged a seigniorage of A per cent. 



chap, i THE NATURE OF THE STATE 31 

Under class three come the administration of 
justice, the provision for religion wherever the 
State has an established church, the general admin- 
istration of the postal service (sometimes, however, 
this is in class four), the administration of special 
rights, like patent rights, copyrights, corporation 
privileges, etc.; also, the recording of titles, etc., 
the laying out and grading of streets, building of 
sewers, etc. ; so, also, the Avater supply in many 
cities, although the provision for this is rapidly 
undergoing a development that Avill eventually 
place it in class one. 

To class four belong almost all of the great in- 
dustries carried on by the State or by cities, the 
monopolies maintained by them for their own bene- 
fit, etc. 

As will be seen from remarks made above in 
connection with the assignment of certain of these 
services to the different classes, there has been, and 
still continues, a certain process of evolution which 
may be generally summed up as a tendency for all 
these expenditures to move from class four to class 
one. There are many instances where expendi- 
tures now regarded as naturally and unchangeably 
belonging to class one were regarded as belonging 
to class four. When a government assumes any 
new industrial function, as, for example, supplying 
water to the inhabitants of a city, that function is 
first assigned to class four and treated as though 
conferring a special benefit only. But it frequently 



32 INTRODUCTION TO PUBLIC FINANCE part i 

comes about that it is regarded as a function con- 
ferring a common benefit at least in part, and passes 
into class three. There are forces at work which 
seem likely to place it finally in class one. In 
the case of highways this transition has been com- 
pletely made, and, except in the case of city 
streets, which still belong to class three so far as 
construction is concerned, but pass into class one 
as soon as finished, highways are treated as confer- 
ring common benefit only. 

In the following chapters on expenditure the 
order indicated above will be followed. The ar- 
rangement of the different expenditures under class 
one will be somewhat according to historical origin 
and importance. 



chap, ii EXPENDITURE FOR COMMON BENEFIT 



CHAPTER II 

EXPENDITURE EXCLUSIVELY FOE THE COMMON 

BENEFIT 

Section 1. In this chapter we will consider ex- 
penditure of the first class ; that is, expenditure so 
clearly for the good of all that no special Net expenc n. 
charge is made upon any of the individ- ture - 
uals incidentally benefited. From one point of view 
expenditure of the second class, wholly for the bene- 
fit of certain persons, who are, however, exempt from 
any special payments, the expense being treated as 
involving only common benefit, is sufficiently like 
that of class one to come under the heading of this 
chapter. But it has been made a part of the next 
chapter in order not to lengthen this one unduly. 
Both of these expenditures might well be called net 
expenditures in distinction from those which, unlike 
them, result in some accompanying revenues. 

The first item is that for general administration. 
Administrative expenditure is for the support of 
those officers of the government who Administra- 
have to do with civil affairs. For con- f ve e ^ endi - 

ture, the civil 

venience it is best to limit it to those list. 
officers whose functions are absolutely indispensable 
to the execution of the laws. The officers who will 



34 INTRODUCTION TO PUBLIC FINANCE part i 

be included vary, from country to country, with the 
frame of the government. It has been customary 
for financial writers, following the lead of the Camer- 
alists, to limit .their discussion of this expenditure 
to that for the crown and court. This is, in Eng- 
land, called the civil list. The peculiar character 
of such expenditure in monarchical countries makes 
it advisable to isolate it. But it must be borne in 
mind that in republican countries there is no corre- 
sponding expenditure. The salaries of the highest 
executive officials in republics are of the same charac- 
ter as those of the ministerial officials in monarchies. 
In England the civil list for Her Majesty's privy 
purse, household, charities, etc., amounts to £407,629, 
and if we add the annuities paid to members of the 
royal family amounting to £ 173,000, the crown may 
be said to cost Great Britain nearly $3,000,000 per 
annum. In most monarchical countries, these ex- 
penses were originally met by the revenues from the 
crown estates. But these revenues from the domains, 
having been absorbed by the general treasury, it be- 
came necessary to make provision for the civil list 
from the general revenues. To the civil list should 
be added the salaries and other expenses of the 
ministries, their clerks, secretaries, etc. In federal 
governments the administrative departments of the 
component parts or commonwealths, as well as that of 
the central government, should be included. Finally 
there come the administrative departments of the 
local governments. It is very difficult to ascertain 



chap, ii EXPENDITURE FOR COMMON BENEFIT 35 

the number of such officials and almost impossible 
to ascertain all such expenses. According to the 
summary in the eleventh census the cost of all the 
executive departments of the United States was 
$16,770,801 in 1890. This does not, in all proba- 
bility, cover more than half the cost of all that 
should be included. 

In monarchical governments, and to a certain ex- 
tent, also, in republican governments, traditional 
sentiment demands that the head of the Expenditure 
government shall hold a social position ° 7 n iecwl 

£> r largely oma- 

of great prominence and perforin certain mental. 
merely ornamental functions, involving considerable 
expenditure. So that the expenditure for the ser- 
vices of the highest officials is generally larger than 
the sums which would be necessary to obtain merely 
efficient service. This lavish expenditure may be 
fully justified on political grounds, but as it involves 
great waste, both directly and indirectly, by exam- 
ple, it cannot be justified on economic or fiscal 
grounds. 1 It is a general fiscal principle, applicable 
as well to this part of expenditure as to any other, 
that the expenditure should not be larger than is 
necessary to secure the most efficient service. The 
justification of this lavishness, therefore, must be 
found, if anywhere, in the creation of some equal 
utility recognised by Political Science. The excep- 
tions made in practice to the general rule of econ- 
omy do not extend beyond the heads of the admin- 
1 Rau, Finanzwissenschaft, sec. 48. 



36 INTRODUCTION TO PUBIIC FINANCE part i 

istrative departments. In the subordinate positions 
the remuneration does not generally exceed that 
Saving in the which must be paid for similar services 
lower-branches . . te m Indee d, there is a cer- 

of the admin- r 

istration. tain saving, in that many of the posi- 

tions, especially where the tenure of office is secure 
for a relatively long period, can be filled at a lower 
cost than the same services command elsewhere, on 
account of the honour attaching to them. In those 
countries where the expenditure for the higher posi- 
tions is largest much is saved by the lower pay 
attaching to subordinate positions. 

In this connection, mention may be made of the 
diplomatic and consular service, which, while partly 
_. . .. conducive to the better performance 

Diplomatic r 

and consular of other functions, as, for example, de- 
fence and the regulation of commerce, 
is yet properly considered to be subordinate to the 
executive departments. Here again the traditional 
opinion that the dignity of the nation can only be 
properly sustained by a lavish expenditure on the 
part of the ambassador or minister, imposes on the 
treasury burdens far greater than the value of 
the services rendered, if measured by the ordinary 
business standards. As the means of communica- 
tion improve and the general efficiency and reliabil- 
ity of the news agencies of the public press grow, 
it becomes harder and harder to justify this extrava- 
gance even on political grounds. The custom of 
lavish expenditure for diplomatic services has not 



chap, ii EXPENDITURE FOR COMMON BENEFIT 37 

been carried to such extremes by the United States 
as by other countries. As these positions are more 
or less of the nature of political prizes, in that 
country, this has probably been to the improvement 
of the service. Foreign intercourse cost the United 
States $1,583,118, in 1894, while Great Britain paid 
.£531,392, or $2,656,960, for that service, not in- 
cluding colonial services of practically the same 
character, which would bring the amount up to over 
£900,000. Generally speaking, the executive de- 
partment costs comparatively little outside of the 
actual salaries. There are some election and similar 
incidental expenses, but not many. 

To the administrative department belongs the 
expenditure for the collection of the revenues. 
Although this is a part of the gross ™ 
expenditures only, it is properly included collecting the 
in the general accounts so as to render revenues - 
control possible. England spends on the collection 
of the customs duties £ 871,915, on that of the in- 
land revenues XI, 814,039, on the post-office gains 
£ 7, 037,785 ; the cost of collecting the total reve- 
nues of £100,660,881 is £13,249,293, or about thir- 
teen per cent. This seems an extraordinarily large 
deduction, but the amount is large because of the 
large amount of expenses connected with the rela- 
tively small returns of the post office and the deficits 
of the telegraph and some other services. The cost 
of collecting customs is only about four per cent, of 
collecting the inland revenues about three per cent. 



38 INTRODUCTION TO PUBLIC FINANCE parti 

In the United States the cost of collecting the cus- 
toms duties was about three per cent in 1893, and 
five per cent in 1894. The receipts fell off in that 
period from 1200,000,000 to 1130,000,000, but the 
expenses did not fall off correspondingly. The cost 
of collecting the internal revenues in 1893 was 
about two and one half per cent, in 1894 it was 
about three per cent. 

Sec. 2. The expenditure involved in the payment 

of salaries to legislative officers, when any such are 

paid, is not the largest part of the ex- 

The expense 1-1,1 • -o 

of the legisia- penses caused by the maintenance 01 
tive depart- such bodies. There are the clerks, 

merit. . , . 

aides, pages, etc., in immediate attend- 
ance upon the bodies during their session, the ex- 
penses of elections, which in this case swell to con- 
siderable amounts, the costs of investigations, public 
hearings, etc., necessary to put the legislature in pos- 
session of the facts upon which to base their actions, 
and the expenses of promulgating laws, publishing 
speeches, reports, etc., all of which together form no 
inconsiderable burden on the finances of every nation 
enjoying legislative government. These expenses, 
also, extend from the federal government down to 
the municipal governments. The desirableness or 
undesirableness of paying legislative officers for 
their services is a matter for Political Science to 
determine, and depends in large measure upon the 
traditions of the different peoples. In England 
relatively little is spent in this way in any of the 



chap, ii EXPENDITURE FOR COMMON BENEFIT 39 

legislative departments of the government from Par- 
liament down to the parish. But in that country- 
there is a tradition of unpaid public service that 
gives her much help in this direction. In the 
United States the direct emoluments and other 
legitimate expenses of the Federal Congress, and 
the direct and indirect, more or less illegal, raids 
by the commonwealth legislatures on the treasuries, 
as well as those made by the city councillors and 
aldermen, are very large. It has been estimated by 
Mr. Moffett 1 that in the 52d Congress of The cost of 
the United States it cost 14,593,922.60 Congress. 
to maintain the House of Representatives alone, 
exclusive of election expenses, or about $6285 a 
day for each day of its existence including Sundays 
and holidays. Of this amount $3,320,000 went for 
salaries. There were, therefore, $1,180,000 spent on 
travelling expenses, clerks, subordinate house officials, 
and contingent expenses (including about $100,000 
for stationery and newspapers). But this is by 
no means all. The expenses traceable mainly to 
this source in the reports of the auditors, of which 
public printing for Congress is an important item, 
foot up to about $7,000,000 per annum, or for the 
two years of the life of a Congress $14,000,000. 
The real cost of the federal legislature to the coun- 
try is even larger than that, but the items are not 
easily traceable in the reports, and some of them, 
like election expenses, are not reported. Directly 
1 Suggestions on Government, p. 150. 



40 INTRODUCTION TO PUBLIC FINANCE parti 

traceable to the legislative departments of both the 
federal and commonwealth governments were, in 
The cost of 1890, $10,500,000. The only expenses 
Parliament, directly attributable to this source in 
England are for the officers of the House of Lords 
<£41,595, for the officers of the House of Commons 
X52,133; total ,£93,728. But many expenses attrib- 
uted to the different departments should be included. 
The fact that the ministry is at the same time execu- 
tive and legislative causes a different distribution of 
the cost, and it is impossible to arrive at an esti- 
mate even as accurate as in the case of the United 
States. England does not print public documents 
for free distribution, so that the expense for station- 
ery and printing is less than half that of the United 
States, being a little over X 500, 000. 

Some mention should also be made of the expenses 
involved in the support of local or semi-local legisla- 
tive bodies. For the United States, there are the 
Cost of local State legislatures and the city councils, 
councils. an( ^ f or England, the local govern- 

ment board and the county and municipal councils. 
Of these, only the commonwealth legislatures are 
purely legislative in character. The others perform 
functions which are better described as administra- 
tive. It is so difficult to obtain a correct estimate 
of the particular expenses for the support of these 
subordinate bodies as to be an unprofitable task. 
These bodies, too, are so intimately concerned in 
the administration of the other functions that we 



chap, ii EXPENDITURE FOR COMMON BENEFIT 41 

gain little by isolating the mere expenses of their 
maintenance. With the commonwealth legislatures, 
however, the matter is different. These are purely 
legislative. In most commonwealths the The cost of 
legislatures are paid per diem, and they com ™ 072 ~ . 

o r 1 j toealth legis- 

are prevented from running up too large latwes. 
bills by the limitation of their term. The per diem 
remuneration and mileage are fixed by law, and 
range from $5 to $10 a day and from five cents to 
ten cents per mile. A loophole for additional ex- 
pense is left by the necessity of allowing the legisla- 
ture to appropriate money for incidental expenses. 
In some commonwealths, as for example in Califor- 
nia, this power is abused to such an extent that the 
contingent expenses amount to much more than the 
mileage, regular clerk hire, etc., combined. Money is 
spent for the hire of personal attendants on members, 
stenographers, clerks, etc., for tours of inspection to 
various institutions, and the like. Most of this ex- 
penditure contravenes the rule of economy. Eng- 
land in the absence of the federal system is spared 
this expense. 

Sec. 3. The construction and maintenance of 
public buildings for the convenience of the execu- 
tive and legislative departments and for p uo u c build- 
other purposes is one of the most impor- in 9 s - 
tant although not one of the largest items of expen- 
diture. The construction of such buildings is of 
course necessary. That they should be imposing 
edifices, handsomely decorated and equipped, is a 



42 INTRODUCTION TO PUB II C FINANCE parti 

matter of national pride. That their construction 
should not be wasteful is self-evident. The extrava- 
gances and theft which have too often accompanied 
the construction of such buildings in the United 
States are too well known to need discussion. They 
are purely abuses and need no farther words of con- 
demnation than they have always received. The 
cost of construction may be regarded as a permanent 
investment, not yielding a money revenue, but far 
greater utilities. The federal government spends 
annually about 13,500,000 upon public buildings. 
From 1789 down to 1882 it spent 185,591,590 for the 
same purpose, or an average of about $900,000 per 
annum. In 1890, all the different branches of the 
government together in the United States spent 
$56,841,147 upon public buildings. The British 
government spent, in 1894, ,£1,750,000 on the special 
account of public buildings, but there are a good 
many similar expenses included in the other supply 
services. 

The exact annual value of these utilities to the 

government cannot be directly estimated in money. 

Indirectlv it might be estimated as the 

The value of jo 

public build- equivalent of the interest on the sums 
mgs - which it would cost to replace them in 

the most economical manner, less the annual cost of 
the repairs. As, in most cases, the original expendi- 
tures were extravagant and wasteful, this method 
of computation would result in a smaller sum than 
the interest on the original cost. 



chap, n EXPENDITURE FOR COMMON BENEFIT 43 

Sec. 4. A nation differs from individuals in that 
no law can be imposed upon it by any external human 
power. The enforcement of the rights and obliga- 
tions of nations in their intercourse with one another 
is left to the different nations themselves. As long 
as international law offers no peaceful means of re- 
dressing wrongs, war is the only recourse. " Inter- 
national law," says Woolsey, "assumes that there 
must be 'wars and fightings' among the nations." 
This assumption is universally correct. There are 
no signs, as yet, that nations will cease to con- 
sider that war, or at least the actual preparation 
therefor, as its sole preventive, is an The co . 
absolute necessity. The whole theory of defence is un- 

.1 . -i -i t r , p avoidable. 

the independence and equality oi sover- 
eign States, upon which international law proceeds, 
throws the maintenance of national dignity, honour, 
and recognised national rights upon the nations 
themselves. The extent and character of prepara- 
tion for war in each State depends upon its his- 
tory, national character, and geographical situation. 
Thus, the warlike traditions, the mutual distrust, 
and contiguit} r of France and Germany, impel to 
extensive preparation for war, and similar con- 
siderations affect other nations of Europe. On 
the other hand, the traditions, national character, 
and geographical position of the United States have 
led to a feeling of security, and a preparation so 
insignificant compared to European armaments, as 
to call forth continual warnings and protests from 



44 INTRODUCTION TO PUBLIC FINANCE parti 

military authorities. The necessity and probable 
continuance of this burden on the finances of na- 
tions being thus predetermined, the only task for 
the student of finance is to ascertain how great a 
burden this imposes on the treasuries and what 
possibility there is for some return. 

There has been much discussion of the relative 
merits and economy of the different methods of 
__ army organisation. It is pointed out 

Different sys- - ° j. 

tems of army that the German system of compulsory 
organisation. service f all c iti ze ns without remunera- 
tion shows a much smaller cost, per man, than the 
English and American system of paid enlistment. 
But it is urged again that there are in Germany 
a larger number of expenses involved in the army 
system, than those of the government, as the per- 
sonal expenditures of the soldiers, the cost to the 
country from the disturbance of production, the 
extra costs of enrolment, of free quarters during 
manoeuvres, etc., which do not appear in the budget, 
but which should be counted in before any fair 
comparison can be made. It would seem that, in 
the end, the actual expenditure for this purpose 
could only be as much less, per man, as the standard 
of life of the soldier is less in the one country 
than in the other. And on this ground it might 
be urged that the German system, which gives the 
soldier but little spending money to waste, and by 
very strenuous measures inculcates thrift and almost 
penurious economy, was on the whole the cheaper. 



chap, ii EXPENDITURE FOR COMMON BENEFIT 45 

How much again this lessens the efficiency, per 
man, and necessitates a larger number of soldiers is 
hard to estimate. In England the volunteer system, 
while adding somewhat to the cost, does not make 
as heavy drains on the treasury as do the German 
reserves ; but as the expenditure by the individual 
members of the volunteer service is for a public 
purpose, it is a part of the cost of the system, and 
a part that is very difficult to estimate. On the 
whole no accurate comparison is possible. The act- 
ual expenses of the different nations as they ap- 
pear in the budgets are as follows : England 1894- 
1895, army £18,000,000, navy £18,700,000, together, 
£36,700,000. United States 1895, army 154,500,000, 
navy 131,700,000, total 186,200,000, but this in- 
cludes over 116,000,000 for the construction of new 
vessels. Including the amounts spent by the com- 
monwealths the total expenditure for military pur- 
poses and the navy were, in 1890, $57,544,617. 
One of the main features of the American system is 
the establishment of training schools for officers, cost- 
ing 1360,000 for the military and 1220,000 for the 
naval academy. In most countries this is a rapidly 
growing expenditure. 

The expenses of actual war are not a part of the 
regular budget of modern nations. They are always 
treated as exceptional or extraordinary The expense of 
expenses. Besides the sums actually ex- war - 
pended by the public treasury there are many indi- 
rect losses and expenses involved. According to the 



46 INTRODUCTION TO PUBLIC FINANCE parti 

estimates of Wilson the cost of wars to England from 
1688 to the present time was over £1,258,680,000. 
The cost to the United States of the Civil War is 
hard to estimate. The debt incurred amounted to 
11,845,900,000 ; 1800,000,000 of revenues were spent 
during the war ; commonwealths and cities spent a 
part of their current revenues and rolled up debts, 
and the pensions will probably amount to over 
$2,000,000,000. 16,000,000,000 represents approxi- 
mately the actual expenditure by all the govern- 
mental agencies on the side of the North. 

The general preparation for internal peace and 
security and the prosecution or punishment of the 
intemaipeace disturbance of that security by individ- 
and security. ua i s or sma n groups of persons is a very 
important item of expense. Such security is gen- 
erally maintained by the police and the military. 
In the United States the chief expense is borne by 
the cities. The States and counties have their own 
police officers for this purpose, as do, also, towns not 
cities. The cost of the police for the whole of the 
United States was, in 1890, $23,934,376. 

Sec. 5. The building and maintenance of roads 
is a source of expenditure which well illustrates the 
general trend of development. Adam Smith re- 
_, , , garde d the maintenance of roads as an 

The cost of o 

roads, a com- activity conferring so special a benefit on 

the individual user that he should bear 

the burden. Even Bastable places them among the 

"industries of the State." 1 But the universal ten- 

i Pp. 193, 194. 



chap, ii EXPENDITURE FOR COMMON BENEFIT 47 

dency is to make the maintenance of roads a common 
burden because conferring a common benefit. The 
care of the roads is generally a duty of the local 
governments, and in the United States the first taxes 
laid in the colonies were for this purpose. The Fed- 
eral government stopped spending much for roads 
and canals after 1840. In the period from 1789-1882 
the total expenditure was only $19,966,465. In the 
year 1890 the commonwealths and local governments 
spent $72,262,023 on roads, sewers, ditches, and 
bridges. 

The maintenance of waterways, roadsteads, har- 
bours, rivers, canals, is also a public function. 
Canals, to be sure, have passed or are D „. 

1 r Public assist- 

passing through the same development ance to navi- 
as roads, and in some respects harbours ga l0 
and rivers have also done so. 1 In the United States 
the dredging and improvement of the facilities for 
navigation in rivers and harbours are the only im- 
portant items of " internal improvement " that have 
been consistently held in the hands of the federal 
government. From 1789-1882 Congress spent 
$106,882,717 on rivers and harbours, and in 1890, 
$11,737,438 were spent thereon. In the same line 
is the maintenance of light-houses, signal-stations, 

1 Many of the harbour expenses of the port of San Erancisco are 
treated as expenditure conferring a special benefit on ship-owners. 
But there is a movement on foot to throw more of these on the 
general revenues, on the ground that they confer a general benefit. 
See San Francisco daily papers November 9, 1895 ; also December 
20, 1895. 



48 INTRODUCTION TO PUBLIC FINANCE parti 

the weather bureau, and life-saving stations. The 
latter is in some countries supported by private 
contributions ; in the United States it costs $1,250,- 
000. The construction of light-houses, beacons, 
and buoys cost from 1789-1882, §77,080,509. In 
1894, the light-house service cost the United States 
$3,250,000. 

Sec. 6. No expenditure commends itself more 
than that for education. It creates the groundwork 
The cost of °f a H political institutions. No expen- 
education. diture in the opinion of Geffcken is more 
" reproductive " than that which the State makes 
for the development of its future citizens. But 
the expenditure of the various countries for this 
purpose cannot very well be compared, because it 
is very difficult to obtain a complete statement of 
all the outgo under this head. The local govern- 
ments generally have certain lower branches under 
their control and pay a part or the whole of the 
expense of those. In federal governments the re- 
mainder of the system is generally under the control 
of the component parts. The United States federal 
government has rendered assistance to the common- 
wealth and local schools by grants of land of un- 
known value, and by the collection and dissemination 
of information through a bureau of education, and 
in various other ways. In England the provision 
for education made by public authorities is gener- 
ally less than in most other countries, the sole ex- 
ception being the provision for technical education. 



chap, ii EXPENDITURE FOR COMMON BENEFIT 49 

Until very recently this line of public activity has 
been regarded by that country as one conferring a 
special benefit and to be paid for in part by fees. 
But it is now pretty clearly the accepted policy of 
all modern nations to provide at least the primary 
education necessary for every citizen as Elementary 
a common benefit and to make it com- education 

. . treated as 

pulsory and free to all the recipients. a common 
In treatment, then, it is as . much a benefit. 
benefit for the rich childless man that the sons 
of his poorer neighbour should be educated as that 
he should have the protection of the police in the 
enjoyment of his property, and he is made to pay 
on that principle. In regard to higher education 
as given in the secondary schools, and technical 
education, there is no such uniformity of practice. 
Education in the rudimentary mechanical arts is 
in fact becoming as important a need of Technical 
society as elementary education in the education. 
usual branches. As the pace of industry becomes 
more rapid and its organisation more perfect, the 
possibility of giving this sort of instruction by the 
old apprenticeship system vanishes. There is no 
place for the boy in the modern factory. Private 
initiative cannot be depended upon to supply the 
opportunity for this sort of education. The State 
has to do so if it is done at all. In this respect 
many of the English cities are far ahead of any 
American city. 1 

1 Shaw, Municipal Government in Great Britain. 



50 INTRODUCTION TO PUBLIC FINANCE parti 

Whether University education should be given 
the recipients free of charge at the common cost is, 
University ll1 practice also, an open question. Had 
education not no t liberal private endowments been 

yet treated as . . 

a common made tor this purpose, it is probable 
benefit- that the question would long ago have 

been settled, and that this branch of education 
would have been treated as the primary was. Uni- 
versity education, even though enjoyed by but a 
relatively small number of the citizens, is far more 
" reproductive " and far more beneficial to the State 
as a whole than even a widely diffused system of 
primary schools. It is quite as important, if not 
more important, to have highly trained leaders of 
public action and thought as it is to have a low 
degree of intelligence widely disseminated. The 
University as a centre for research alone is worth 
many times what it costs. In proportion to the 
benefits which it confers on the State it is, where 
run at the general cost, the least expensive part of 
the whole system. The provision made by many 
of the western commonwealths of the United States 
for the liberal endowments of Universities from the 
public funds has been without exception the most 
beneficial and economical expenditure they have 
made. In Germany, too, a large part of the ex- 
pense is borne by the State. Closely related to 
education is the maintenance of museums, libraries, 
picture galleries, and scientific investigations. These 
comprise in most countries an important part of the 



chap, ii EXPENDITURE FOR COMMON BENEFIT 51 

provision for education. The United Kingdom 
spends on all these educational works £ 9, 783, 469 
from the general treasury, and a far larger amount 
from other sources. In the United States in 1890 
the total public expenditure for education was 
$145,583,115, which was by far the largest expen- 
diture for any one purpose. 

Sec. 7. Indirectly all public expenditure aids pri- 
vate industry and commerce. But there are many 

forms of direct aid, that are treated and , . , 

Assistance of 

regarded as conferring a common bene- industry and 
fit on all alike although accruing to the commerce - 
good of certain persons. Bounties are sometimes 
offered for certain products. Enterprises of various 
kinds receive subventions. The so-called protective 
system involves an indirect expenditure of the 
people's money in the same way. The expense 
of maintaining the currency, of building and keep- 
ing up roads, canals, harbours, and the like is of the 
same character. So are many public buildings, as 
exchanges, markets, slaughter-houses, structures and 
grounds for public fairs and the like, and commis- 
sions and other organisations for disseminating 
knowledge concerning horticulture, agriculture, and 
various industries. The maintenance of a system of 
weights and measures, also, belongs here. Besides 
all those mentioned and some others which are gen- 
erally treated as expenditures for the common benefit, 
there are a great many things which the State does 
for the benefit and assistance of industry and com- 



52 INTRODUCTION TO PUBLIC FINANCE parti 

merce that are regarded as conferring special benefit 
and treated as such. 

The administrative control of private industry 
and commerce has become a necessity on account 
c , of the growing power of modern organi- 

private enter- sations of capital. The necessity has 
been widely felt of controlling industrial 
monopolies, and we have numerous commissions for 
the regulation of railroads and the like. To this 
branch of expenditure belongs also the cost of the 
control exercised for the protection of the public 
health over the production and sale of foods. This 
is mainly an expenditure of the local governments, 
although it occasionally enters into that of the 
central government, especially in the case of im- 
ported foods. The cost of the enforcement of sani- 
tary regulations of all sorts is another expenditure 
of the same character. 



chap, in EXPENDITURE FOR INDIVIDUALS 53 



CHAPTER III 

EXPENDITURE FOE THE BENEFIT OF INDIVIDUALS 

Section 1. In this chapter we shall consider the 
remaining three classes of expenditure. These are 
not so very closely akin, but have one point of simi- 
larity ; namely, that they are all for the particular 
benefit of individuals. The first, however, is not so 
treated by any nation, but is treated as though it 
were an expenditure for the benefit of all. The 
relief of indigence and the protection charitable 
of society against the insane and the expenditure. 
criminal, the care of the feeble-minded and other- 
wise defective classes, and the care of the sick are 
among the most costly and most discouraging feat- 
ures of public expenditure. In the United States 
the expenditure for pensions, charities, and gratui- 
ties amounted, in 1890, to $146,895,671, or nearly 
a million dollars more than that for educational pur- 
poses and the common schools. Generally even 
after the State has done all that it can be induced 
to do there is still room for private effort in the same 
direction. The expenditure by private persons and 
societies for exactly the same purposes is even larger 
than that of the government. So that this is un- 



54 INTRODUCTION TO PUBIIC FINANCE parti 

doubtedly the heaviest of all public expenditures. 
The relief of poverty has generally received more 
attention in treatises on Political Economy than 
in works on Public Finance. But it belongs very 
properly to the latter science. It is generally a 
local, rather than a national, expenditure, but on 
account of its vast size and economic importance has 
often received the attention of the central authorities, 
and is in many cases, at least partly, under their 
control. There is almost no expenditure that fails 
so signally to accomplish anything like permanent 
results. As frequently administered, poor relief has 
aggravated the very evils it has been intended to re- 
lieve. The words of Mai thus are still true : "We 
have lavished enormous sums on the poor, which we 
have every reason to believe have constantly tended 
to aggravate their misery." 1 Yet the expenditure 
is necessary, indeed imperative, and will be so as 
long as the present sentiments on the subject pre- 
vail, unless we can remove the causes. That this 
may be done by the extension of educational facili- 
ties, especially technical schools, is a frequent con- 
tention. The student of finance need not enter into 
the question of the causes nor of the cure of poverty. 
Indigence is there, and the State has assumed the 
duty of relieving it. The modern methods of relief 
are fast coming to be as economical and efficient as 
the conditions under which they are necessarily 
administered admit. Like war, this is a form of ex- 

1 Essay, p. 438. 



chap, in EXPENDITURE FOR INDIVIDUALS 55 

penditure that shows little tangible result that can 
be measured in terms of money. 

The general principle applied in the granting of 
continued assistance to the poor is that the cause 
of poverty to be relieved must be such The principles 
that it cannot be removed by the candi- 9 ovenun 9 le 

J granting of 

dates for assistance. In other cases, only assistance. 
temporary assistance is rendered. Those who can 
help themselves are desired to do so. The four 
agencies which really work together toward the 
same end are the civil, the ecclesiastical, the 
associated, and the individual. These should all 
work harmoniously and should avoid duplication of 
work. The assisted persons should, so far as possi- 
ble, be put under conditions which will enable them 
to help themselves to the limited extent that they 
are able. The repression of vagrancy and the pun- 
ishment of wilful paupers, who are really able to 
support themselves but unwilling to do so, is left to 
the courts. 

Although poor relief is mainly a local duty, Great 
Britain contributes .£710,000 annually from the cen- 
tral treasury for " non-effective and charitable ser- 
vices " ; of this over £500,000 are for pensions. In 
the United States in 1890 public charities alone (not 
including pensions) cost $40,000,000 ; but this sum 
does not include the value of provisions, etc., raised 
on the poor-farms, or at the work -houses, of which 
no accurate estimate can be formed. 

Very different from the older sort of poor relief 



56 INTRODUCTION TO PUBIIC FINANCE part i 

is the institution of old-age pensions on the insur- 
ance plan. Such institutions, for example, as the 
T German, for compulsory insurance may 

Insurance r j j 

against old be made self-supporting and in time 
age ' promise to relieve the State of a part of 

the burden of poor relief. If indigence is to be re- 
lieved by the State at all, such expenditure must be 
regarded as conferring a common benefit on all. 

Modern society supports the insane and criminal 
classes at public cost. In this way the greatest 
Insane and possible saving is made. Indeed, the 
criminal cos t neec [ no t be nearly as great as it is. 

classes can be ^ 

made self-sup- lo a large extent prisons can be made 
porting. self-supporting. It is perfectly feasible 

by a proper division of the field between the differ- 
ent institutions to make the prisons, insane asylums, 
and the like entirely self-sustaining. Hard labour 
is frequently a part of the criminal's sentence, the 
less violent insane can be made to work, and some- 
thing can be got, by proper supervision, from the 
feeble-minded and the paupers. By an exchange of 
products between the different institutions the neces- 
sary diversity can be obtained. There is little excuse 
for the too common uselessness of the labour imposed ; 
the tread-mill and oakum-picking of our older prison 
discipline ; the digging of unneeded ditches by the 
insane, etc. Exchange of products, too, avoids the 
danger of conflicts with the labour unions, which so 
often arise when a prison attempts to make a product 
for sale in the open market. This expenditure is very 



chap, in EXPENDITURE FOR INDIVIDUALS 57 

closely related to the one for the maintenance of in- 
ternal peace and security. The burden falls mainly 
upon the finances of the central organ, or, in a 
federal State, upon those of the component common- 
wealths. The policy of isolating the defective classes, 
the insane and criminal, the deaf and dumb, the feeble- 
minded, and the like is an economy for society as a 
whole, and if it can be made to prevent the propa- 
gation of these weaknesses, is far-sighted. 

Hospitals for the sick are imperative needs in the 
case of infectious diseases ; they are great blessings 
and very desirable from the standpoint 
of expediency in all cases. The opposi- 
tion so frequently manifested by private medical 
practitioners to public hospitals is a sufficient proof 
of their economy. Generally this is a local ex- 
penditure. Certain branches of the government, 
like the military and the naval, have generally 
found it necessary, on account of the large number 
of persons in their employ, to make provision by 
hospitals for the care of their own sick. The main- 
tenance of quarantine stations for the isolation of 
persons coming from infected countries or districts 
is a national affair. Its cost may at times rise to 
a considerable amount. But there is no question 
as to its necessity and economy. In the United 
States there are arrangements for quarantine be- 
tween the different States partly at the cost of the 
federal government and partly at that of the com- 
monwealths. 



58 INTRODUCTION TO PUBIIC FINANCE parti 

Sec. 2. Old-age pensions for officials Avhose lives 

have been spent in the public service, or for soldiers 

whose health has suffered, for the good 

Pensions. . . 

ol all, are but the proper recognition oi 
those services. They may be regarded as sums 
reserved from the wages from year to year and 
paid over in this form. In that case this expendi- 
ture should be placed under class one. This is 
the case with most of the pensions in England, and 
there they are generally, correctly classed under the 
expenditure for the departments to which the men 
pensioned belonged before they retired. But when 
this expenditure becomes, as it has in too large 
measure in America, a means of reward for political 
services rendered to candidates for public office, it 
cannot be placed anywhere but in class two, being 
then an expenditure for the benefit of certain persons 
considered as though it were for the benefit of all. 
The rapid increase of expenditure for this purpose 
in the United States, as well as the curious features 
of that increase, show that it cannot all be justified 
by any rule of economy. In this country only 
soldiers are pensioned. Under general laws, which 
require only that there shall be sufficient proof that 
the applicant is entitled to a pension, all those 
who base their claims on inability to work or ex- 
cellent services are pensioned. But many others 
are pensioned by special acts of Congress. The 
amount of pensions has increased since the Civil 
War, rapidly, but irregularly. The following table 



chap, in EXPENDITURE FOR INDIVIDUALS 



59 



shows the highest and the lowest points of each 
fluctuation : 



1865 . 










$16,347,621 


1869 . 










28,476,621 


1871 . 










34,443,894 


1878 . 










27,137,019 


1880 . 










56,777,174 


1883 . 










66,012,573 


1884 . 










55,429,228 


1889 . 










87,624,779 


1890 . 










106,493,890 


1893 , 










158,155,342 


1894 . 










140,772,163 


1895 . 






about 140,500,000 


1896 . 




. 




« 


141,581,570! 



Great Britain spends £ 535,454, on " superannua- 
tions and retired allowances," but special pensions for 
distinguished services, military and naval, civil and 
judicial, amount to £116,837, and some others are 
covered by the supplies for the different departments. 

Sec. 3. Under this class belongs also that expen- 
diture which is made for the development of in- 
dustry by bounties and the protection of home 
industries against foreign competition. The lat- 

1 There are still nine widows of soldiers of the Revolutionary 
War on the list of pensioners. It is estimated that there is a 
possibility that some of these may survive until 1916. There are 
45 survivors and 4445 widows of soldiers of the "War of 1812. 
From Indian wars there are 3104 survivors and 3284 widows. 
From the Mexican War are 13,461 survivors and 7686 widows ; all 
the rest are attributable to the Civil War. Widows of soldiers 
who took part in that contest may still be on the pension list in 
the year 2002. — World Almanac, 1895. 



60 INTRODUCTION TO PUBLIC FINANCE parti 

ter expenditure differs from the former only in 
that the sums spent do not pass through the hands 
of the officers of the treasury. The recipients of 
this assistance collect it directly from the contrib- 
Assistanceto utors in the shape of higher prices for 
industry in their wares than would otherwise pre- 
bounties and vail. With the economic side of this 
"protection." expenditure, and the possibility or im- 
possibility of adding permanently to the wealth 
of a nation by this process, we have nothing to 
do. But as many important nations, all, in fact, 
except England, Norway, Holland, Belgium, Swit- 
zerland, and Denmark, practise this form of ex- 
penditure, we cannot avoid at least a statement of 
its character. The revenues derived by the gov- 
ernment from taxes on the commodities actually 
imported will be considered in Part II. But so 
far as any actual " protection " is afforded the home 
producer it is an item of expenditure. In effect 
it is practically the same as if a subsidy or bounty 
were paid out of taxes collected from the consumers 
of the goods in question, to the producers. This 
expenditure is made not so much in the hope of 
increasing the total wealth of the nation directly 
as in the hope of obtaining a greater diversity of 
, r . , products, so that in the end the effect 

JS/ot begun as r 

a permanent will be to increase the wealth, indirectly, 
po icy. by allowing for a greater division of 

labour, and consequently for more steady and 
efficient production. This policy has nowhere 



chap, in EXPENDITURE FOR INDIVIDUALS 61 

been begun as a permanent one, but one of its 
results is the growth of powerful vested interests 
which make for permanence. Thus bounties are 
paid directly from the treasury, or protection is 
afforded to industries which it is hoped will event- 
ually be self-supporting but which are not so at 
the time. At different times circumstances have 
caused this policy to be supported by different 
arguments. Practically all the most important 
arguments have been used at different times in the 
United States, where protection has prevailed with 
scarcely a break from 1816 to 1895 and still prevails 
in large measure. The oldest of those arguments 
is known as the " infant industries argu- Arguments by 
ment." It is urged that new, weak in- ^ c ^f c " 

° tion has been 

dustries cannot hope to live if subject supported. 
to the competition of older foreign industries. At 
the same time it is maintained that in case of war it 
would be practically necessary for a country to be 
able to supply all its own needs. This grows directly 
into the argument of List, which is in the main to the 
effect that a nation's prosperity, in general, depends 
not so much upon the mass of wealth produced as 
upon the greatest possible diversity of its industries, 
so as to develop all possible phases of its national 
production. Just as the human body is healthier 
when all the muscles are uniformly developed, than 
when a few are abnormally strong, so, it is argued, a 
nation is more truly prosperous when all its produc- 
tive forces are moderately active than when its en- 



62 INTRODUCTION TO PUBLIC FINANCE parti 

tire force is expended in a few lines. Later comes 
the . patriotic or "home market" argument, which 
urges that the home producer has a claim on the 
custom of the home consumer. Finally this argu- 
ment develops into the famous " pauper labour " 
argument, and it is maintained that the home pro- 
ducer has been enabled to pay his workmen higher 
wages than the same classes of workmen receive in 
foreign countries, on account of protection, and that 
to remove that protection would be to reduce the 
home workmen to the standard of life of the for- 
eigners. This latter argument is largely an appeal 
to class interests for votes and is not quite tenable. 
The infant industries argument, it is generally ad- 
mitted, is incontestable. The strongest argument 
in favour of the continuance of this subsidising of 
industries has been developed from that of List. 
This may be restated somewhat as follows : if the 
productive energy of a nation has but a few outlets, 
as in exploiting natural advantages, there is a great 
danger that the nation's economic life may become 
stagnant. If, however, production be diversified, 
even by an artificial process, it is much easier to 
keep the current of productive energy in motion, 
allowing it to be turned in whatever direction new 
advantages may open up. 

While it may be admitted that there is great force 
in these arguments, it must be remembered that 
protection is very heavy expenditure, not less heavy 
because it is hard to estimate its amount. There 



chap, in EXPENDITURE FOR INDIVIDUALS 63 

is a practical limit set to the possible amount of 
expenditure in this direction by the wealth of the 
people. If this process places too heavy D . .. 

*• L jr r- j Protection is 

a burden on the nation's annual wealth a heavy ex- 
increment, the burden will not be borne, pen l we ' 
and the end defeated. That is, if the " protected " 
infant industries finally outgrow the need of sub- 
sidies, and fix prices by competition, the drain upon 
the resources of the country ceases. If they do not, 
the subsidising process may continue so long as the 
general mass of the wealth is not thereby too seri- 
ously curtailed. A nation may be able to pay for 
diversification of industries, just as it may be able 
to pay for schools, for parks, for museums, for libra- 
ries, etc. But the limit of such expenditure is set 
by what the nation can afford. This limit is too 
frequently overlooked ; it is too often forgotten that 
all protection is public expenditure. No "protec- 
tion " is afforded unless the price is raised. The 
difference between the price that would have pre- 
vailed and the price that does prevail is the amount 
the nation spends for this purpose. This is not 
offset by any gain in wealth, and can only be justi- 
fied by the desirability of having a diversity of in- 
dustries. 

Sec. 4. We now come to those expenditures that 
are treated as conferring a benefit divided between 
the particular individual who pays for what he gets, 
and the people as a whole who pay in the general 
taxes for the general or common benefit. The first 



64 INTRODUCTION TO PUBLIC FINANCE parti 

and oldest of these is the expenditure for the courts. 
The adjudication of disputes between different per- 
Expenditure sons was one of the earliest functions of 
/or leaanin- Qr 0vernmen t. ^q payment of the costs 

istration of ° r J 

justice. was originally thrown upon the suitors. 

But modern governments conceive that it is in the 
common interest to have justice universally ad- 
ministered. Upon the general and accurate admin- 
istration of justice depends in great measure the 
prosperity of business. But either as a preven- 
tive of too frequent litigations or on account of the 
special benefit supposed to accrue to the suitor, the 
costs are divided, and one part paid by the people, 
the other — a minor part — by the suitor. In crim- 
inal cases the whole cost, practically, falls on the 
State ; in civil cases the attempt is generally made 
to assess the cost upon the party at fault. In Eng- 
land, the cost of the judicial system is ,£3,787,167. 
A large part of the local administration of justice 
is rendered without emolument by the Justices of 
the Peace. The United States federal expenditure 
for this purpose is about $7,000,000. The common- 
wealths, the counties, and the cities spend much more, 
making a total of over $23,000,000. Besides the 
mere deciding of disputes and of criminal cases, the 
judicial departments perform other legal functions of 
importance, as, for example, the probating of wills, 
the disposing of property of intestates, etc. Some- 
what similar legal functions are performed for the 
special benefit of the individual citizens by the 



chap, in EXPENDITURE FOR INDIVIDUALS 65 

administrative branches of the government, as reg- 
istration and legalising of deeds, mortgages, mar- 
riages, and other contracts, the granting and 
registration of copyrights, trademarks, patent rights, 
corporation rights, etc. 

In the United States the courts have developed 
a number of legislative and administrative functions 
of great importance. As the interpreters of the 
federal and commonwealth constitutions, they have 
had to meet new conditions, and indicate the bear- 
ing of the constitutions thereon. They have often 
been called upon to interpret the meaning of con- 
stitutional customs that have grown up outside of 
the written documents, and have in this way given 
those customs a certain degree of legal prominence. 
They were formerly in some of the commonwealths 
(following an old English custom) allowed to deter- 
mine the tax levy or apportionment. Quite re- 
cently, by the use of injunctions, they have exercised 
a sort of administrative control over industry, es- 
pecially as affects the relations of employers and 
employees in industrial monopolies of public impor- 
tance, as for example common carriers. In the con- 
trol of municipal corporations, both by punishing 
illegal acts and compelling due compliance with dis- 
cretionary duties, they have largely performed the 
functions exercised by the administrative depart- 
ments in Europe. 1 In all this work they are con- 
sidered as acting for the common benefit. 
1 See Goodnow, Municipal Home Bide. 



66 INTRODUCTION TO PUBLIC FINANCE parti 

Sec. 5. Other functions that are similarly treated 
need but to be enumerated. Among them are the 
laying out and grading of streets, building of sewers 
for the benefit of all the citizens, and the special 
Betterment of " betterment " of the property of abut- 
property , etc. ^ n g landowners. The division made 
here is generally that the first cost is assessed to 
the specially benefited persons, the subsequent 
costs, maintenance, etc., to the people. The supply 
of water is similarly treated in many cities. One of 
the best examples of this sort of expenditure is that 
of the post office, as managed in the United States. 
This service is almost, but not quite, entirely treated 
as conferring a special benefit on the users. The 
cost of the distribution of newspapers within the 
county in which they are published is treated as 
a public benefit. In some countries the post office 
is so managed as to yield a surplus, in which case it 
passes into class four. 

Sec. 6. Expenditures of class four are part of 
the gross expenditure only. When a State spends 
money in wages and in the purchase of a plant and 
raw materials for the production of porcelain and 
state Indus- "the like, it expects to get it all back 
tr y- again from the sale of the commodities. 

The same is true of a city maintaining a gas plant, 
of a State railroad, etc. Originally, the State made 
use of public lands, forests, mines, etc., as a source 
of income, but now there are a great many indus- 
tries and enterprises which the State conducts more 



chap, in EXPENDITURE FOR INDIVIDUALS 67 

for a public purpose than for the gain to the public 
treasury. A city does not operate its street rail- 
ways primarily as a source of income, but to guar- 
antee the citizen good and cheap service. Hence 
the gross expenditure for this purpose is a very im- 
portant item. It is growing to be more and more 
so as time goes on. 

Some of the more important industries that the 
State carries on are for the purpose of supplying 
itself with certain commodities, as arms, Manufacture 
ammunition, war-ships, and the like, of supplies. 
Such industries are carried on from the highest 
branches of the government down to the lowest. 
We find, for example, many American towns sup- 
plying a part of the support of the inmates of its 
public institutions by cultivating the lands of the 
poor farms. 

Some of the most striking instances of such in- 
dustrial expenditure are connected with communi- 
cation and transport, and with those industries the 
management of which, on account of the tendency 
to monopoly, is frequently put into public hands. 
Examples of this are numerous among those already 
mentioned. Many industries have been at different 
times and places so managed as to cost more than 
they brought in. That is, they have resulted in a 
net deficit, not a net profit. They thus pass into 
class three. 

A rather significant list of enterprises has in 
modern times been entered upon by the State, which 



68 INTRODUCTION TO PUBLIC FINANCE part i 

might be, but are not, managed so as to yield a 
revenue that offsets their cost. These are museums, 
libraries, parks, baths, and the like. They belong 
under class one. 



PAET II 

PUBLIC REVENUES 



CHAPTER I 

THE CHARACTER AND CLASSIFICATION OF PUBLIC 

REVENUES 

Section 1. German writers on Public Finance 
generally begin the discussion of revenues with the 
statement that the State requires services The state re- 
and commodities. The services are fur- 0ui ^ esse ' lvices 

ana commoai- 

nished by the citizens ; at first by all in ties. 
virtue of membership in the State, later by particu- 
lar ones, who are paid for them. The commodities 
or wealth required may be produced by the State 
or taken from the citizens. In the ancient primitive 
community, services are rendered by the citizens as 
their proper contribution to the State. The com- 
modities needed are for the most part furnished by 
the individuals without any recognition of a transfer 
of ownership to the State. The division of labour 
necessary for the successful administration of more 
complex affairs of the State demands a separation 

69 



70 INTRODUCTION TO PUBIIC FINANCE part n 

of the persons permanently in the service of the 
State from the other classes. These must then be 
supported from somewhere, and in classical times 
this is accomplished by giving the State, or what 
is the same thing in classic thought, its special 
officers, the income from certain sources, as mines or 
productive enterprises, and taxes upon tributary peo- 
ples, or certain inferior classes of citizens. Out of 
these funds the public officers were supported, and 
those paid in the service of the State for the exercise 
of its functions were maintained. 

Again, in the middle ages, feudalism furnished a 
mode of support for public officers by giving them a 
certain control over land and its occupants, a means 
which, without the use of money, provided services 
„ , 7 . and commodities for the public needs. 

Feudalism L 

providesfor But later as money became more plentiful, 
e neec s of an( j ^ n orc "jj nar y transactions payments in 

out the use of kind and in services were commuted into 
money. payments in money, the government in 

turn commuted services due into money payments. 
At the same time, lands, originally conveyed to pub- 
lic officers in consideration of their public services, 
and to enable them to perforin those services, passed 
absolutely into their control and were treated, in 
part at least, as their private property, and the ser- 
vices and commodities they yielded became the 
private income of these individuals and their fami- 
lies. But although the revenues from the domains, 
retained in this same way by those families, which 



chap, i CLASSIFICATION OF PUBLIC REVENUES 71 

became the sovereigns, were still applied to public 
expenses, they soon became insufficient, as the State's 
functions grew, and other resources were sought. 
In the mad scramble for public revenues, old rights 
to dues and services were tenaciously retained by 
rulers or their officers. Especially were the claims 
to military and similar general services held. These 
claims, too, were finally commuted into money pay- 
ments, which became compulsory just as the services 
from which they were derived had been compulsory. 
The names used for the first revenues, which ex- 
ceeded the receipts from domains and the customary 
services, show very distinctly the volun- „ 7 7 . 

J J The voluntary 

tary character of the payments. They character of 
are called beggings, requests, gifts (beden, tie P a y nients 
petitionee, benevolences, dona), or from the receipts from 
point of view of the assistance given, aids omams - 
(aide, steuer). With the gradual growth of the 
needs, for which these demands Avere made, into per- 
manent needs, with the further centralisation and 
concentration of the public functions, the neglect of 
public duties by the feudal lords, and quasi-public 
officers quartered on the land, and with the conse- 
quent performance of these duties by the government, 
the demands upon the people became permanent and 
compulsory. 

Sec. 2. Since the emergence of the monarchical 
State from feudalism the trend of affairs has been 
directed by the growth of constitutionalism, — or 
the representation of the people in the govern- 



72 INTRODUCTION TO PUBLIC FINANCE part ii 

ment. As the whole advance of this movement 
turned upon the success of the people in obtaining 
The growth of the control of the purse, it is evident 
constitution- that the resulting changes in the financial 
in uniformity system must have been very important. 
in the revenue xhe long history through which the dif- 

systems of the 

different coun- terent revenues nave passed, the neces- 
tries - sity of constant compromise between the 

different interested parties, and the various changes 
made necessary by the growth in the economic life 
of the world, all these have left modern States 
with a most confused jumble of revenues. Yet 
with all the irregularities and anomalies that can 
be found in the revenues of any modern State, 
there is still in every case a more or less clearly 
traceable systematic development. This growth of 
system is clearly due to the work of the represen- 
tatives, in whose hands the development of con- 
stitutional government finally placed the control of 
the collection and spending of the public money. 
As these representatives realised the need of reve- 
nues, they naturally sought for some principles of 
right and justice to guide them in the choice of 
sources. The result has been a partial uniformity 
in the systems of the different countries. 

It should not, however, be imagined that this 
uniformity is very great, nor that the systems of the 
different countries are alike in details. But some- 
what the same fundamental ideas seem to underlie 
all. There are also great differences. Thus one 



chap, i CLASSIFICA TION OF PUBLIC RE VENUES 73 

country chooses to obtain the larger part of its 
revenues from a tax not used at all in another. 
Historical practices and differences in „ 7 . .,,.-, 

r Slight di fer- 

tile frame of government necessitate ences in de- 
modifications even of the same principle. 
That bugbear of the student of Public Finance, 
practical expediency, which has ruined many a fine 
theory, works in the most astonishing ways to pre- 
vent the execution of approved principles. 

Sec. 3. The uniformity above noted came about 
as a natural result of the general search by the 
agents of constitutional government for some good 
reason why, in each case, the particular person con- 
tributing should be called upon to do so. As the 
representatives of the people, they naturally had to 
satisfy, in some way, the reasonable desire of the 
people for some clearly defined method of appor- 
tionment. As it is generally hard enough to con- 
vince men of the need of contributing anything, 
the plea put forth must be a strong one. If we 
confine our attention, for the purposes of illustra- 
tion, to taxes alone, which are the hardest of all 
revenues to justify, we can see more clearly how the 
necessity of thus showing good reasons Different 
led to uniformitv- It is evident that if a es y l n 

J samejustifica- 

the representatives had, for instance, in- tion of taxes. 
formed their constituents that "taxes are one-sided 
transfers of economic goods or services " 1 they would 
have had considerable difficulty in getting consent 
1 Part of the definition of taxes by Professor Ely, pp. 6 ? 7, 



74 INTRODUCTION TO PUBLIC FINANCE part n 

to any taxes. But when they announced, "taxes 
are paid in return for the benefits conferred upon 
you by the government," it was easier to collect 
them. When they proceeded to assess taxes on the 
basis of a more or less definite attempt to measure the 
benefit conferred, or where, in the nature of things, 
an actual measurement was impossible on some other 
basis of supposed equality, they clearly had a very 
good case to present to their constituents. It re- 
quires but the slightest knowledge of the history 
of constitutional legislative bodies to prove conclu- 
sively that such was the process of reasoning. And 
this fully accounts for the similarity of the systems 
of various countries. 

Whenever it was perfectly clear that a certain 
function conferred a special benefit on an individ- 
ual citizen the charge was made on him, and those 
persons not so clearly benefited were wholly or par- 
tially exempt. Thus we have the practice of tolls 
from persons using the roads, of fees from the suitors 
at court, or the sale of some privilege or com- 
modity to the citizens for a price, as in the case of 
granting a monopoly, or the sale of manufactured 
wares, or of lumber, or ore from the domains. But 
many of the more important functions do not result 
so clearly in a special benefit to the individual, and 
recourse is had to some other mode of justification. 
At first, naturally, the older ideas are developed. 
The services traditionally due from the citizen to the 
State, of which that of military service is the most 



chap, i CLASSIFICA TION OF PUBLIC RE VENUES 75 

prominent example, are recalled and appealed to. It 
is claimed that money should be given in commu- 
tation of these services. Then the ground is shifted 
again and again, and many apparently different 
reasons are advanced. But in all these changes one 
thing is clear, — the shifting of argument is made in 
order to enable the use of some new meas- rn 

Changes in 

ure of the amount of taxation, and at thefoi^ms of 
basis the justification remains practically ® xaw ™ are 
the same. The citizen is asked to pay, search for new 
because he shares in the benefits common measwes - 
to him and his fellows. But this common benefit 
does not suggest any particular measure. 

Sec. 4. Another point of similarity between dif- 
ferent nations must be studied historically ; that is 
the feature of compulsion. This feature ~ . . 

r Compulsion is 

is old and universal. It is, perhaps, older a universal 
than any one of the nations and began in •' ea me ' 
that feudal system from which they emerged. The 
citizen had to be conrpelled to render his service to 
the State, whenever the special benefit to him was 
not clear. That feature the most advanced consti- 
tutional governments have retained. There have, to 
be sure, been instances where States, and especially 
cities, have had recourse to voluntary contributions 
to meet the expenses giving a special benefit. But 
these soon passed into compulsory. A fine example 
of the development of a voluntary contribution into 
a tax is found in the English poor-rate. In the 
twenty-seventh year of the reign of Henry VIII. , 



76 INTRODUCTION TO PUBLIC FINANCE part ii 

1536, collections were made for the impotent poor 
(voluntary). In the first Edward VI., 1547, bishops 
were authorised to prosecute all who refused to con- 
tribute for this purpose (compulsion enters). In the 
fifth Elizabeth, 1563, the Justices of the Peace were 
made judges of what constituted a reasonable contri- 
bution (compulsion as to the amount). And from 
the fourteenth Elizabeth, 1572, regular compulsory 
contributions were levied. So they have continued. 
Sec. 5. We have already classified expenditures 
according to the character of the benefit conferred. 1 
Now the almost uniform practice is to 
of revenues collect compulsory revenues from all the 

according as citizens for those expenditures that con- 
vey are justl- in • 

fled by coin- * er a common benefit, or one that is so 
mon or. special treated ; then to collect special compul- 
sory revenues for a part of the cost from 
those persons regarded as specially benefited by ex- 
penditures of class three ; while the revenues for 
meeting the fourth class of expenditures are raised 
by the sale of the commodities or services. 

Professor Seligman finds that there are three dis- 
tinct classes of revenues, each resting on a different 
justification. 2 The first of these three we will call 

1 See Part I., Chap. I., sec. 6. 

2 See Seligman, "Classification of Revenues,' 1 in the Quarterly 
Journal of Economics, April, 1893, and April, 1895 ; Essays, Chap. 
IX. In my opinion Professor Seligman has not improved his clas- 
sification by the refinements introduced in the second article. Nor 
is the necessity for distinguishing between fees and special assess- 
ments clear. Special assessments are a kind of fee, even within 



chap. I CLASSIFICATION OF PUBLIC REVENUES 77 

taxes. This is a slightly narrowed use of the term. 
In the broadest sense an exercise of the taxing power 
of the State occurs whenever a compulsory contribu- 
tion of wealth is taken from a person, private or 
corporate, under the authority of the public powers. 
But such a broad definition of taxes would include, 
also, the charges for expenditures of the third class, 
levied to pay the cost or part of the cost of a 
special service. As these are certainly different from 
those charges levied to meet the expenditures con- 
ferring a common benefit, it is necessary to adopt 
the narrower definition. In this sense then taxes 
are general compulsory contributions 
of wealth levied upon persons, natu- 
ral or corporate, to defray the expenses incurred 
in conferring a common benefit upon the residents 
of the State. A tax is justified, but not necessarily 
measured, by the common benefit conferred. 

When a distinct attempt is made to levy the 
charge only where a traceable or assumed special 
benefit is conferred, and to make it cover the cost, 
or a part of the cost, thereof, the compulsory pay- 
ment is a fee. In the broadest sense fees are taxes, 
but they are not taxes in the narrower sense defined 
above, and compose a large and important class by 
themselves. A fee has a different justification from 

the terms of the Professor's definition of fees. Nothing is gained 
by raising classes logically secondary in character to first place. 
It is sincerely hoped that the simple general outlines of Professor 
Seligman's classification, as given in the text, may find general 
acceptance. 



78 INTRODUCTION TO PUBLIC FINANCE part n 

a tax. A fee never exceeds the cost of the special 
service rendered. A charge for a special benefit 
that exceeds the cost is best regarded as consisting 
of two parts, one a fee, the other a special tax. A 
fee may be defined as a compulsory contribution of 
wealth made by a person, natural or cor- 
porate, under the authority of the public 
powers to defray a part or all of the expenses in- 
volved in some action of the government, which, 
while creating a common benefit, also confers a 
special benefit, or one that is arbitrarily so regarded. 
The third category of revenues is called by Pro- 
fessor Seligman prices. The price of the commodi- 
ties or services made or rendered by the government 
differs in no essential particular from the price paid 
for similar commodities or services ren- 

JPvicss cl&fiiiGcl . 

dered by individuals. The price is the 
value of these commodities expressed in terms of 
money. If the State has a monopoly, it may act 
as a private person would and take " all the traffic 
will bear," or it may forego a part of the possible 
gain, and the payment becomes or approaches a fee. 
If the State has no monopoly, it must, perforce, act as 
an individual would, subject to competition. Every 
civilised country has these three categories of reve- 
nues, and combinations thereof, and no more than 
these. Every civilised country recognises the same 
justification for each contribution. Every govern- 
ment appeals to the same motives to induce the pay- 
ment of each class. In the case of the first two 



chap, i CLASSIFICATION OF PUBLIC REVENUES 79 

classes the motive is compulsion, in the last the 
government withdraws and allows the interest of the 
individual to bring him forward and induce him to 
make the contribution. This class has been called 
voluntary. If this term meant merely the absence 
of compulsion, the spontaneity as it were of the con- 
tribution, it would be satisfactory. But generally 
there is the danger of confusion arising from the 
implication in the term that the contribution is with- 
out return, of the nature of a gift. Hence, in order 
to show the character of the payment, Professor 
Seligman has called it contractual. Prices may be 
There are serious objections to this term ? a e , co . n ~ 

J tractual reve- 

also, although it is of such a character nues. 
as to admit of a technical application veiy easily. 
But in lieu of a better and for sake of uniformity 
we will adopt it. 

Sec. 6. Thus far, for sake of simplicity, and not to 
depart from the usage of other writers, we have con- 
sidered the revenues as practically identical with the 
money flowing into the treasury. Services rendered 
without pay do not belong to our subject, compulsory 
But still it is not quite accurate to iden- revenues are 
tify the public revenues with the money contractual 
that flows into the treasury. Money is are not - 
here, as in private households, but the representative 
of wealth. When the government compels its sub- 
jects to pay contributions of classes one and two, 
taxes and fees, it does so in order to obtain control 
of wealth which it takes from the people to consume 



80 INTRODUCTION TO PUBLIC FINANCE part n 

for a public purpose. But in the case of contractual 
revenues the matter is quite different. Here the 
government simply sells, for money, wealth: material 
things, privileges, or services which it has brought 
into existence. The transaction is a simple sale. 
This is partly true of some fees. The money that 
flows into the treasury simply takes the place of 
actual wealth already created or being created by 
the government. The important thing to note is 
that prices result in little or no increase in the 
amount of wealth in the hands of the government, 
unlike the other cases, but a mere change in the form 
of the wealth already owned. It is not wealth 
taken from the people to be consumed by the govern- 
ment; but wealth created by the government is 
turned into money so that it may be more con- 
veniently consumed. Nothing is taken from the 
people at all, for they receive back the equivalent 
of their money in wealth, over which they then have 
control as owners. In the case of compulsory rev- 
enues the matter is different because 

Compulsory 

revenues leave they receive back nothing tangible, but 
the individual s i mp i y en j oy the common or special 

in the same *■ J J J L 

position as benefits of good government. These 
though he had benefits are of the same character ex- 

consumed his 

wealth. Con- actly as the benefits which accrue to 

tractualmere- ^ individual when he CO nsumes his 

ly represent a 

change in own wealth. They are " reproductive," 
form. ^ a j. gj^^ j n ^e same sense that the 

consumption of bread by the worker is repro- 



chap. I CLASSIFICATION OF PUBLIC REVENUES 81 

ductive. That is in no sense at all. Just as 
the aim of all production in the economic world 
is consumption or the satisfaction of wants, so the 
end and aim of the compulsory collection of rev- 
enues is consumption by the State. Sometimes, to 
be sure, the government turns these funds into 
permanent forms of wealth which are slowly con- 
sumed; as, for example, roads. Sometimes, too, 
the government adds to the effective power of the 
wealth before consuming it, or uses it to produce 
new wealth; but yet so far as the individual is con- 
cerned, he has parted with his property in a way 
which leaves him benefited, to be sure, but in ex- 
actly the same position as when he spends the same 
amount for some gratification. Quite the contrary 
is his position when he buys a piece of china made 
by the government, for then he has the equivalent 
of his money. The government, too, is no richer 
than before, but has its wealth in a form which 
better suits it. 1 Frequently the government uses 
the wealth created directly without first turning it 
into money. This wealth is as much a part of 
the revenues as any that is sold. 

We may now change our terminology slightly, 
and say that there are three sources of public rev- 
enues : the first is collected from all the citizens 
by compulsion, on the ground that certain expen- 
ditures are necessary and confer a common benefit 
upon all ; these are taxes. The second is collected 
1 Cf . Stein, Finanzwissenschaft, II., 138. 



82 INTRODUCTION TO PUBIIC FINANCE part ii 

by compulsion from certain persons on the ground 
that they are specially benefited by some expendi- 
tures ; these are fees. And lastly, the State creates 
wealth for itself. The wealth thus created consti- 
tutes a part of the revenue of the government be- 
longing to the third class. This, whether sold or 
not, is contractual revenue. 

Sec. 7. One or two minor matters have to be no- 
ticed and our classification is complete. Sometimes 
States receive gifts, generally for some 
revenues special purpose. These are now rare and 

gifts, rever- unimportant. The special purpose is 

sions, by emi- . 

nent domain usually more or less outside the general 
fines, andpen- functions of the State. Sometimes the 

alties. „ , 

htate receives property by reversion, or 
takes property which has no apparent owner. This, 
too, is an insignificant category. The State may 
exercise the right of eminent domain and take prop- 
erty for some purpose. Generally speaking, it re- 
stores an equal amount of some other kind of wealth s 
so this transaction results in no net revenue. The 
State is the recipient of not insignificant sums from 
fines and penalties inflicted under the penal power. 
These are compulsory contributions levied with an 
intent to injure, and differ materially from the other 
categories. Their nature is clear, and they will re- 
ceive no further attention. All the receipts of the 
State come under one or the other of these cate- 
gories. 



chap, ii CLASSIFICATION OF TAXES AND FEES 83 



CHAPTER II 

THE CLASSIFICATION OF TAXES AND FEES; 
DEFINITIONS 

Section 1. Considerable confusion in the dis- 
cussions of the different modes of taxation is due 
to the failure to distinguish clearly between the 
justification of taxation in general (i.e. The measure 
why there should be any taxes at all), of taxation 

. distinguished 

and the measure 01 taxation (i.e. what from the justi- 
should be the basis upon which to de- fi cation - 
cide how much each citizen should pay). The uni- 
versally accepted justification of taxation is the 
common benefit conferred upon the individuals by 
the action of the government. But the common 
benefit is, strictly speaking, equal, while the taxed 
citizens are unequal in wealth. Therefore re- 
course has to be had to some other measure of 
taxation. It lay nearest, in the search for such a 
measure, to assume that there was a difference in 
the benefit enjoyed by the different citizens. Thus 
one theory assumes that protection to life, liberty, 
and property is the chief benefit con- The benefit 
ferred, and that this benefit, or at all theor y- 
events its cost, varies as the property varies, gener- 
ally in exactly the same proportion. This theory 



84 INTRODUCTION TO PUBLIC FINANCE part n 

has been called the benefit theory of taxation, be- 
cause it attempts to estimate by the benefit con- 
ferred the amount of tax each individual should pay. 
The difficulties involved in measuring benefit, 
with sufficient accuracy to serve as a basis for taxa- 
tion, led another school of thinkers to abandon that 
entirely. These writers felt that each citizen was 
necessarily a part of the organism of the State, one 
of the nourishing cells as it were. And as in all 
organisms of nature each organ or each cell con- 
tributes to the life of the whole, in accordance with 
its powers or strength, so each citizen should con- 
tribute as he is able. They claim that it is easier to 
measure ability than it is to measure benefit. This 
The faculty theory is called the faculty theory, the 
theory. term " faculty " having been found in 

this sense in early tax laws. Generally speaking, 
this ability is supposed to be indicated in some way 
by wealth. But the advocates of faculty as a meas- 
ure of taxation encounter a serious difficulty in at- 
tempting to ascertain whether faculty is proportional 
to wealth or increases more rapidly as wealth in- 
creases. A negative side of the same idea is pre- 
sented when it is claimed that the tax should 
impose an equal sacrifice upon every citizen. In 
determining what constitutes equal sacrifice, we 
encounter the same difficulty as in determining 
how to measure ability. 1 

1 See Chap. III. for further discussion of this point. A full and 
instructive discussion of these theories is to be found in Seligman's 
Progressive Taxation in Theory and Practice. 



chap, ii CLASSIFICATION OF TAXES AND FEES 85 

Sec. 2. It will be noticed that the basis from 
which each of these measures starts is wealth. The 
first argues that benefit is indicated by wealth, the 
second that faculty is so indicated. If Difficulties in 
wealth is the basis, then the classifica- the wm J °f 

finding a nat- 

tion oi taxes might be made to depend ura i ciassifica- 
on that of wealth. Such a method, tion of taxes. 
although tried, has been found impracticable, be- 
cause the processes of shifting render it impos- 
sible to ascertain the final incidence with suffi- 
cient accuracy for classification. It has also been 
suggested that we might use the different specific 
means employed by nations to measure benefit or 
faculty. But here again we meet with difficulties 
that are almost insuperable ; for in that case the 
classification will depend on the theory adopted as 
to the correct measures. If we adopt the benefit 
theory, our classification will depend on the differ- 
ent indices of benefit chosen. If we adopt the 
faculty theory, then our classification will be accord- 
ing to the indices of faculty. But we are not at 
liberty to adopt one or the other of these theories 
exclusively, because no nations have done so in 
practice, and their taxes are some of them based on 
the one theory, or at least best explained thereby, 
and some on the other, while many combine both or 
may be interpreted in either way. At the same time 
many taxes that could not be justified on either 
basis are retained by the nations on grounds of general 
expediency, because they yield considerable revenue, 



86 INTRODUCTION TO PUBIIC FINANCE part u 

or because they have been long in use. If, there- 
fore, we adopt a classification presupposing either 
theory, we shall find many taxes that do not con- 
form to it. Inasmuch as no consistent plan for 
the measurement of taxation has been adopted by 
any country, no uniform method of classification 
upon " natural " grounds can be found. 

These difficulties are inherent in the matter that 

we are attempting to classify. The librarian gen- 

7-^, 7 erally desires to arrange his books ac- 

These dvfficul- J ° 

ties are insu- cording to the subjects treated. But 
pera e. encyclopaedias could not be so arranged 

without tearing the books to pieces. We might 
theoretically dissect each tax, and assign its parts 
to the different categories according to the real 
nature of each part. But we gain little by this 
painful process. In this case classification will not 
help us to ascertain the real nature of the things 
studied. 

These difficulties have not always been regarded 
as insuperable, and many brave attempts have been 
„ . made to overcome them, but with so 

Previous 

attempts at little uniformity as to mark the failure. 

classification, m-i -i , i -n j- 

Inere are almost as many classifications 
as writers. The least satisfactory of all are those 
that attempt to find some natural arrangement. 
Those which have the most apparent success accept 
the official names used by the treasury departments 
of the different nations, and give them merely such 
limitation as is necessary to use them scientifically. 



chap, ii CLASSIFICA IT ON OF TAXES AND FEES 87 

Sec. 3. Perhaps the most common distinction is 

that made between direct and indirect taxes. This 

distinction first obtained theoretical im- _ 

The distrnc- 

portance in the writings of the Physio- tion between 
crats. By direct taxes they meant any direct and in - 

° j j direct taxes is 

of those taxes which were levied imme- old, and im- 
diately upon the " prodnit net." There P ortant ' 
alone, they argued, could be the fund out of which 
taxes could be paid. To levy taxes anywhere else 
was indirect, because the burden would be shifted 
from one to another until it rested there. The 
assignment of any particular tax to one or the other 
of these categories was with them a mark of ap- 
proval or condemnation. With the recognition that 
other economic processes besides those which added 
to the material property of the world created wealth, 
this peculiar theory of taxation drifted into abey- 
ance. The same terms, however, have been widely 
used by officials and writers and have such preva- 
lence that a recognition of them cannot be avoided. 

Rau and Wagner have made the most elaborate 
attempts to define the modern usage. In this they 
were only partly successful, because of Wagner's deji- 
irregularities in official usage. But de- nUl0ns °f . 

° ° direct and in- 

spite these irregularities the terms are direct taxes. 
valuable. Wagner's distinction is practically as 
follows. There are two ways in which direct and 
indirect taxes differ. (1) In the case of direct 
taxes, at least in the expectation of the law-giver, 
the tax-payer is also the tax-bearer ; any shifting of 



88 INTRODUCTION TO PUBIIC FINANCE part n 

the burden to another is not expected, not desired, 
and sometimes, even, forbidden, or subject to pen- 
alty. Indirect taxes are, vice versa, those in which 
the tax-payer is not permanently the tax-bearer, or 
is not intended to be ; but a shifting of the burden 
to another is expected and desired, and may even be 
prescribed. 1 

But this element of shifting is not the only one 
that is essential to the idea. The second character- 
Administra- istic is what may be called the techni- 
tive conception ^ administrative conception of direct 

of direct and x 

indirect taxes, and indirect taxes. It is based on the 
method of procedure. (2) Direct taxes are such 
as are regularly laid according to some fixed fact 
(or one so treated, and at least somewhat fixed), 
something regularly recurrent, and hence previously 
ascertainable, — a fact as of personality, of rank, of 
property, of earning, etc., — and are, consequently, 
assessed according to some list or roll. (Cadastre.) 
Indirect taxes, on the other hand, are such as are 
laid according to some changing, temporary, more 
or less accidental fact which is, consequently, not 
previously ascertainable, — something the result of 
processes, events, transactions, — and are laid and 
collected according to tariffs. 2 

These two methods of distinction follow quite 
closely the usages of theoretical writers and of offi- 

1 Wagner, Finanzwissenschaft, II., 1st ed., p. 269 ; 2d ed., sec. 
97-100. Schonberg's Handbuch, 3d ed., III., p. 171. 

2 Wagner, Finanzwissenschaft , II., 2d ed., p. 239. 



chap, ii CLASSIFICA TION OF TAXES AND FEES 89 

cial bureaux. There are important exceptions in 
some countries. Thus in France the customs duties 
are not officially classed as indirect Exceptions in 
taxes, but form a class by themselves official usage. 
akin to direct taxes. In the United States at the 
time of the Civil War the income tax was viewed by 
the courts as an indirect tax, or at least not as a 
direct tax in the sense of the Constitution. 1 This 
decision, however, was reversed in 1895 by a bare 
majority of the same court, which decided that a 
similar income tax was a direct tax in the meaning 
of the Constitution. This decision is in accord with 
the distinction made above. 

The principal direct taxes are : the land taxes, 
building taxes, property taxes, poll taxes, class taxes, 
income taxes, industry taxes: the indirect m 

J I axes oelong- 

taxes : the customs duties (with the ex- ing to each 
ception of the French), internal excise m ' 
taxes, transaction taxes, most fees and licenses. 
The inheritance taxes, or death duties, as they are 
called in England, are not easy to classify. In the 
first sense they are direct taxes, and in the second 
they are indirect. This is, perhaps, the only impor- 
tant tax that cannot be easily classified. „--.,.. 

J The inheri- 

The inheritance tax wherever it exists is tance tax hard 
used because it is expedient and with- t0 c ass v y ' 
out much cost yields a large return. It is levied 

1 Springer v. United States, 102 U. S. 508. See article "The 
Direct Tax of 1861," Quarterly Journal of Economics, July, 1889 ; 
Seligman, "The Income Tax," Forum, 1895. 



90 INTRODUCTION TO PUBLIC FINANCE part II 

at a time when the persons paying it are not in 
position to demand a strong justification. It is 
sometimes justified on the ground that it compen- 
sates for previously unpaid taxes. If this justi- 
fication holds, then the inheritance tax must be 
classed as a direct tax. 

Sec. 4. A few other terms which are often used 
as the names of different groups of taxes and help 

„ in a way to classify them must be men- 

Taxes on per- J J 

sons,prope?*ty, tioned in this connection. We some- 
times speak of taxes as being separable 
into (1) those on persons, (2) those on property, 
(3) those on income. These terms do not indicate 
the final source from which the tax is paid, but the 
basis upon which it is levied. 

1. In the case of personal taxes the different per- 
sons who are to pay the tax are listed and assessed, 
either (1) individually, as in the case of per capita 
taxes, or (2) as representatives of a group, as in 
the family or hearth taxes, or (3) according to 
Personal some characteristic, as rank in life, office, 
taxes - employment, age, etc., supposed to be 
indicative of the benefit they receive from the gov- 
ernment or their ability to pay. A complete sys- 
tem of such taxes might be built up, and it is possible 
to suppose that all the requirements of justice could 
be met thereby. 

2. Taxes on property are those taxes which take 
the property owned by a person as the index either 
of the benefit received or of the ability to pay. 



chap, ii CLASSIFICATION OF TAXES AND FEES 91 

These taxes may be considered as pursuing prop- 
erty wherever it is to be found, with little or no 
regard for the personality of the owner. p r0 perty 
They are not, of course, in any but the taxes - 
most exceptional instances, paid out of property. 
But no particular regard is had to the real source 
of payment. They may be levied upon any and 
every kind of property. They are sometimes called 
real taxes from res, things. But this usage has no 
established sanction in English ; in that language 
real taxes are taxes upon real estate. 

3. Taxes on income in the broadest sense are all 
those taxes which make wealth in the 

... , Income taxes. 

process of acquisition the basis of assess- 
ment. These are of two principal kinds: (1) those 
which are levied upon the annual increment of wealth, 
as such, irrespective of the person who is the recipi- 
ent thereof. That is, they treat the various items 
of wealth increment as the basis of taxation without 
regard to the grouping of these increments into a 
whole in the income of any particular person, and 
consider the person paying the tax, only in so far as 
he is an income producer through his own activities. 
This is the character of the British income tax. (2) 
Those which demand of each person, or seek to ob- 
tain concerning each person, a summary of the total 
income he receives. This latter tax is sometimes so 
treated as to make it difficult to distinguish it from 
a personal tax, for the different persons are listed and 
classed according to amount of income they receive. 



92 INTRODUCTION TO PUB II C FINANCE part ii 

By a peculiar and entirely unwarranted use of com- 
mon English terms in a strange and foreign sense, 
Subjective property, income, and the like have been 
and objective called the tax objects, and the correspond- 

tccxcs* An 

unallowable i n g taxes objective taxes, meaning that 
distinction. they are taxes on things in distinction 
from taxes on persons. On the other hand, the per- 
sons are called the tax subjects, and personal taxes 
called subjective. This usage, although it has the 
sanction of a great authority, in Professor Bastable, 
has fortunately not been favourably received. Pro- 
fessor Seligman, in a review of Bastable's book, 
pointed out that by the object of a tax we usually 
mean the purpose of the tax, and the tax subjects 
may be things as well as persons subjected to the 
tax. 1 

Sec. 5. Following the lead of Adam Smith, various 
attempts have been made to classify taxes 

Classification 

of taxes, ac- according as they fall upon one or the 
cording as other of the different shares in distribu- 

they fall upon 

rent, interest, tion, — rent, interest, profits, and wages. 
profits or But, as Bastable has well shown, the 

wages, fails. . 

sources trom which the different taxes 
are paid are generally a combination of several of 
these. The wealth or income of very few persons 
consists of simply one of these shares. The attempts 
to carry out such classifications consistently have 
failed. Bastable's attempted compromise by calling 
such taxes as can be traced directly to one or the 
1 Political Science Quarterly, VII., p. 717. 



chap, ii CLASSIFICA riON OF TAXES AND FEES 93 

other shares in distribution primary, and all others 
secondary, brings us to practically the same results 
that were gained by Wagner in the discussion of 
direct and indirect taxes. His primary taxes are 
those called direct taxes above, his secondary are the 
indirect. 

One other important set of distinctions must re- 
ceive our attention, because it has the sanction of two 
prominent authorities. Wagner suggested and Cohn 
accepted the classification into, taxes paid - 

r x Taxes on ac- 

out of wealth at the time of its acquisi- quisition, 

tion (Urwerb'), or while in possession taxeson P os - 

v y r session, and 

QBesitz), or upon its consumption ( Ver- on consump- 
braucli). This distinction, according to l0n ' 
the stage in which the tax finds the wealth from 
which it is paid, is often useful in showing the ef- 
fects of certain taxes. 

Another very valuable distinction is that made 
by the term "taxes on revenue." Taxes Taxes on reve- 
on revenue are those that fall or are as- nue - 
sessed on the revenue, or income yielded by different 
kinds of property. These are a species of taxes on 
acquisition. 

The three sets of terms which we have used in 
this work are : (1) direct and indirect taxes, (2) 
personal, property, and income taxes, (3) taxes paid 
on wealth at acquisition, in possession, and at the time 
of consumption. 

Another distinction based upon the method of fix- 
ing the rate is important because of the use made of it 



94 INTRODUCTION TO PUBLIC FINANCE part n 

in the American Constitution. That is the distinc- 
tion between apportioned and proportioned taxes. 
„ , Taxes are apportioned when the whole 

Proportioned rr 

and appor- amount to be raised is fixed and then 
divided among the different tax-payers. 
They are proportioned when the rate is fixed and 
then assessed on the base, which may be either the 
property or the income of the tax -payers. 1 

Sec. 6. We now come to the important task of 
classifying fees. The essential consideration to be 
Classification held in mind about these payments is 
of fees follows that they cover a part of the total cost 

that of govern- . , . . . . 

ment activi- of certain governmental activities, which 
ties - are performed for the benefit of all, but 

yet confer a real or assumed special benefit on the 
individual. When the payment covers the whole or 
a little more than the whole cost, it is a price. Since 
fees are levied upon the receivers of certain benefits 
from the government, it follows that the only classi- 
fication for fees is that which shows what activities 
of the government convey the benefit. We can thus 
classify according to the different departments of 
the government, for the services of which fees are 
collected. 

1. The most numerous are the judicial and legal 
Judicial and fees, the character of which has already 
legaifees. been made clear from the discussion of 
the nature of these expenditures. 2 Examples of 

1 See further definitions in sec. 8. 

2 See Part I., Chap. III., sec. 4. 



chap, ii CLASSIFICA TION OF TAXES AND FEES 95 

these are the regular court costs and fees, probate 
fees, the charges for recording deeds, mortgages, 
contracts, marriages, etc. 

2. Next come the administrative fees for the spe- 
cial services of that department. They are : police 
fees, charged for the special benefits ac- Administra- 
cruing or supposed to accrue to the indi- twe f ees - 
viduals from the exercise of the police power of the 
State ; the fees for education, when charged ; a 
large number of industrial and commercial fees for 
services rendered individuals in their industrial and 
commercial undertakings. The industrial fees in- 
clude license charges for permission to carry on cer- 
tain businesses (care must be taken not to confuse 
these with police fees, nor with business taxes as- 
sessed on the same plan). Commercial fees include 
road and canal tolls, harbour dues, and a number of 
similar charges. 

A very important class of administrative fees are 
those known as special assessments or in England as 
" betterment " taxes, levied for local improvements 
affecting property, as streets, sewers, etc. special assess- 
Professor Seligman has defined these as ments - 
follows: "A Special Assessment is a compulsory 
contribution paid once and for all to defray the cost 
of a specific improvement to property undertaken in 
the public interest, and levied by the government in 
proportion to the special benefits accruing to the 
property owner." He regards them as of so much 
importance as to make them a class of revenues 



96 INTRODUCTION TO PUBLIC FINANCE part n 

co-ordinate with taxes and fees. Strictly speaking, 
they are fees. 

Sec. 7. The revenues derived from prices or from 
the production and sale of commodities or services 
The analysis are of exactly the same character as the 
? ?prf earnings of the people. This is true 
cai Economy, whether the products sold are derived 
from the public domain or from public industry. 
The principle underlying this kind of revenue, the 
analysis thereof, and to a certain extent the disposi- 
tion thereof, are the general subjects of Political 
Economy. To introduce a discussion of it here 
would be to invade the main fields of economic sci- 
ence. Surely, unless we commit the fallacy commonly 
attributed to the mercantilists of regarding money 
alone as wealth, and treat all the monejr flowing into 
the treasury as revenue, no matter whether it merely 
takes the place of other kinds of wealth or not, we 
must exclude a full discussion of prices from the 
subject of public revenues. 

But since a great deal has been made by writers of 
note, of the money prices received in this way as a 
part of public revenues, a few words in defence 
of this position are necessary. 1 Let us take the 
common example of the water supply. We may 
suppose that a certain city is supplied with water 
by two private companies, both of which have the 

1 Most German authorities discuss either the net or the gross 
income from domains. Cf. Bastable and Seligman on "Classifi- 
cation." 



chap, ii CLASSIFICATION OF TAXES AND FEES 97 

right to lay pipes wherever they wish. They will then 
supply water, supposing that they actually compete, 
at prices determined mainly by the costs, _, , 
which are those of management, interest the water sup- 
on the " plant," the supplies and running p y ' 
expenses. The average prices will be considerably 
higher than need be by virtue of the duplication of 
the plant, etc. Suppose, however, before any ma- 
terial duplication is reached they unite, forming one 
company which has the monopoly. The charges 
will now be regulated by "what the traffic will 
bear," and provided the supply is ample will tend 
to conform to those rates which will yield the largest 
net returns. The principles by which monopoly 
prices are regulated are well known to students of. 
economics. The charges in this case cannot be 
greater than the cost to the citizens of operating 
their own wells, nor even so high as to induce the 
citizens to economise materially in their use of 
water. But suppose that the townspeople are not 
content with the rates, or with the service. They 
attempt regulation and fail. They may determine 
to buy out the plant. Once the city owns the plant 
it may run it in one of four ways. (1) The four 

It mav run it as the company did, to met ° so f 
J r j public man- 

make the highest possible profits, charg- agement. 
ing all or nearly all the traffic will bear. The surplus 
over costs goes into the treasury and helps to defray 
the other expenditures. But the rules determining 
what the traffic will bear are rules of pure econom- 



98 INTRODUCTION TO PUBLIC FINANCE part ii 

ics. There is absolutely no difference between this 
public business and a private business. The method 
of " charging what the traffic will bear " is the 
method in economic life of determining the value 
of commodities so sold. It takes the place in the 
sale of monopoly goods of the " free dickerings of 
the market " by which the price of other goods is 
determined. 1 The private company had to pay ex- 
penses, so does the city ; the private company en- 
joyed a surplus or made an " unearned increment," 
so does the city ; the private company spent this 
surplus to the satisfaction of the wants of its stock- 
holders; the city spends the surplus to the benefit or 
satisfaction of the general wants of the citizens, who 
may be regarded as its stockholders. Even if it fore- 
goes taking quite all the surplus, the principle is the 
same. A private company often does that in defer- 
ence to public opinion. (2) The city may decide 
not to make money, but to charge only what the 
service costs and make the service as good as possi- 
ble. It then foregoes taking the full price of the 
wealth that it has produced and allows each con- 
sumer to enjoy the surplus. Then the payment by 
the citizen is a fee. (3) It may charge a fee much 
smaller than the cost, or a fee for all water con- 
sumed over a certain amount, but provide a certain 

1 See Sidgwick, Bk. II., Ch. X.; Andrews, Institutes of Eco- 
nomics, p. 112; Marshall, Ec. of Ind., pp. 180 ft; Senior, 
pp. 103-114; Sumner, Essays, p. 46; Hadley, B. B. Trans., 
p. 100; Seligman, Bailway Tariffs, etc., pp. 8 ff. 



chap, ii CLASSIFICA TION OF TAXES AND FEES 99 

amount of water for each citizen at the common cost. 
(4) It may distribute the water freely and pay for 
it out of the common fund derived from taxation. 
Now the sums received in the last three cases are 
all regarded as payments for the public only three of 
service. They are an essential part of these methods 

governed by 

the public revenues, taxes, and fees, fiscal princi- 
Their amount is not determined by P les - 
any process known to political economy for de- 
termining prices. But so long as the principles 
determining the amount of the money taken and the 
management of the business are, as in the first case, 
purely economic, there is no need of including this 
money, as distinct from the wealth produced in 
the revenues of the public treasury, and burdening 
financial science with a discussion of matters fully 
within the scope of the larger science. All that we 
need to say is that the State produced so and so 
much wealth in the form of such and such com- 
modities which it sold for so and so much money. 
These economic industrial or commercial revenues 
are supplemented by others which are of a fiscal 
character. 1 

As Professor Cohn has so well pointed out, it is 
a very different problem that we have to deal with 
when the management of some industry Taxation by 
is made merely the form or means for ™ eans °f in ~ 

J austrial mo- 

collecting a tax from certain classes of nopoiy. 
persons. The French tobacco monopoly, for exam- 

1 Cf. Cohn, sec. 98. 



100 INTRODUCTION TO PUBIIC FINANCE part ii 

pie, is not in any sense to be looked upon as an in- 
dustry undertaken in the common interest, or even 
in the interest of a particular class. It is the aim 
of the French government to tax the users of to- 
bacco. This aim is attained by other governments 
through different processes. The form of a monop- 
oly has been found to be remarkably easy, expedient, 
and successful as a method of indirect taxation. 

Sec. 8. The base of a tax is the thing or phenom- 
enon upon which the tax is assessed. The base is 
not always the source. Thus a tax 

The "base." _ J . __ . _ 

based on property is generally paid out 
of income or revenue, which comes sometimes from 
the property, sometimes from some other source. 
The direct taxes are almost always called by the 
name of the u base." 

The tax-rate is the amount of the tax falling on 
each unit of the base. The base is generally ex- 
Th a „ pressed in units of values ; as for ex- 
and the "unit ample $100 worth of property. It may, 
o/ e ase. however, be some other unit, as one per- 
son, one ox, one acre, one yard, one ton, etc. Some- 
times the unit of the base is very complex. For 
example, in Vermont the rate is so much, say $1.50 
on each $1.00 in the " Grand List." But only 1 per 
cent of certain kinds of property is entered in the 
grand list. This arose, originally, from the custom 
of fixing a definite uniform value for each piece of 
property, as so much per acre of land, so much per 
head of cattle, so much per horse, irrespective of 



chap, ii CLASSIFICATION OF TAXES AND FEES 101 

the actual value, and then fixing the rate upon this 
artificially constructed base. 

The rate may be proportioned, apportioned, pro- 
gressive, digressive, or regressive. 

When the rate is proportioned, it is the same per 
cent of all property. When it is appor- "Propor- 
tioned, the total amount to be raised is ?* one rate ' 

'appor- 

ascertained and then distributed, share turned" rate. 
for share, on each unit of the base. 

A tax is progressive when the rate increases more 
rapidly than the base ; that is, when a higher per 
cent is assessed upon the higher values «p r0 gres- 
than upon the lower. This progression sive" rate. 
may be regular and start from the very smallest base, 
or one unit. For example, the rate may increase 
in some geometrical ratio, while the base increases 
in an arithmetical ratio. Of course any set of ratios 
may be chosen. The progression may be irregular 
in several different ways. Thus the progression 
may go by stages ; i.e. between certain limits, in 
arbitrarily fixed groups, the rate may be proportional, 
but increase gradually with each higher group. Or 
the progression may affect only certain parts of the 
base. That is, a certain minimum may be taxed pro- 
portionally, then a certain part taxed progressively, 
and the proportional rate may set in again after a 
certain high point has been reached. Again, a cer- 
tain minimum may be altogether exempt, and the 
rate after that progressive. 

The rate is digressive when the progression grows 



102 INTRODUCTION TO PUBIIC FINANCE part ii 

smaller as the base increases. There are various 
ways of accomplishing this. The most common is to 
"Digressive " exempt a certain moderate amount of the 
rate - base and deduct that amount from all 

larger sums, while a nominally proportional rate is 
levied on the remainder. In this way a proportion- 
ally increasing burden is laid on the larger amounts 
of the base ; but the ratio of increase grows grad- 
ually less, until, when the base reaches a very large 
amount, the increase in rate is practically nil, and 
the rate becomes practically proportional. For ex- 
ample, we may have an income tax in which the rate 
is 3 per cent on all income in excess of $500. The 
man who has $1000 pays 1.5 per cent on his whole 
income, while the man who has $10,000 pa}^s 2.85 per 
cent, and the rate approaches but never reaches 3 per 
cent by ever decreasing amounts. So that the man 
with an income of $100,000 pays only 0.0015 less 
than three per cent. Another method is to make a 
deduction for the incomes below a certain amount 
only, the rate above that being proportional. A di- 
gressive rate is properly an irregular form of pro- 
gression. Both progressive and digressive taxes are 
sometimes called graduated. 

A regressive rate is just the reverse of a progres- 
sive or of a digressive rate. In this case the rate 
"Regressive" decreases as the property increases, and 
rate - a heavier burden is laid on the smaller 

amounts. The regressive rate may be irregular in 
as many ways as the progressive. That is, it may 



chap, ii CLASSIFICATION OF TAXES AND FEES 103 

vary in the reverse of any of the ways in which the 
progressive rate may vary. 

Assessment is the name applied to the whole proc- 
ess of ascertaining the amount of tax due from each 
person or property. It consists of two "Assess- 
steps, (1) the valuation of the property went." 
or income, or the listing of the things taxed; (2) 
the levying of the rate or tax, that is fixing the 
amount each unit is to pay. 

The tax list or roll contains the record of the 
amounts assessed and levied. In some European 
countries these lists are, for certain 

_ . _ "Tax list." 

taxes, elaborate, permanent, or partly 

permanent records which serve various legal pur- 
poses as well as the fiscal, as for example the 
record of titles, and are called cadastres. 

Impost is a general term for any tax, but there 

is a 'tendency to make it synonymous 

. "Impost. 

with indirect taxes. 

Customs duties are indirect taxes levied on the 
goods imported into or exported from "Customs 
certain territories. duties." 

Excises (English) or internal revenue taxes 
(American) are indirect taxes levied on (l „ . „ 
goods produced or consumed within "internal rev- 
certain territorial limits. enue taxes " 

Toll was originally a general term for many 
taxes, but it has come to have a special 

ii "Toll." 

meaning, and applies only to the charges 
for passage over roads, bridges, canals, etc. 



104 INTRODUCTION TO PUBIIC FINANCE part ii 

A tax is said to be shifted when the tax-payer 
"Sh'ff " reimburses himself from some one else. 
and"inci- The final incidence of the tax is the 
falling of the burden upon some per- 
son who does not shift it. 



chap, in THE TAX SYSTEM 105 



CHAPTER III 

THE TAX SYSTEM 

Section 1. No nation has ever found it feasible 
to adopt any single tax as the sole source of its 
income. No nation at all advanced in civilisation 
has attempted to conduct its government entirely 
from the earnings of its domains or industries. 
Every civilised nation of to-day combines the three 
sorts of revenues, those produced by its own activi- 
ties and those obtained from taxation and from fees. 
And furthermore, no nation attempts to exist with 
only one of each of these kinds of revenues. These 
different forms are combined into a „ 

Taxes 

"system" or general scheme, which con- of various 
forms more or less closely to the general s ° rtsareco ™- 

J ° oined into the 

ideal of justice which may have been national sijs- 
adopted by the nation. To judge of the em ' 
justice or expediency of any tax it should be studied 
in its place in the "system." We have already seen 
the two main theories as to the proper measure of 
taxation, the one, that taxation should be measured 
by benefit, the other, that it should be measured by 
faculty. A perfect system would so combine the 
different forms that the total burden imposed would 
be in accord with the ideal adopted. 



106 INTRODUCTION TO PUBLIC FINANCE part n 

There is a constant tendency toward the simplifi- 
cation of tax systems, although most modern systems 
The dream of are still extremely complicated. It is 
a single tax. ^} ie cL re am of financial theorists, and has 
been ever since the science began, and it is the aim 
of many would-be reformers, to find a single tax that 
will furnish all the necessary funds for the support 
of the government. The Physiocratic impot unique 
on the produit net is well known, as is also the jus- 
tification therefor. It is also well known wherein 
this fails. Modern proposals generally involve some- 
thing more than mere tax reform. The socialistic 
Single pro- demand for a single, exclusive income 
gressive in- £ ax w ith a progressive rate, is advanced 

C071XQ tCLQC CLThd 

the Georgian with a hope of effecting a redistribution 
land tax. f ^ ie we alth of the world. Henry 

George's well-known scheme for a single tax on 
land has a similar ulterior purpose. His object is 
to free industry from trammels which he supposes 
are due to the existence of private property in land. 
In form his proposition is not unlike that of the 
Physiocrats. He is an extreme individualist, but 
he aims, like the socialists, at a new distribution 
of property. Of these two modern schemes for a 
single tax the first is perfectly feasible from the 
fiscal point of view. Such a tax could probably 
be administered and could be made to yield ample 
revenue. It fails, however, to answer the sim- 
plest requirements of justice. For example, it 
would not, unless our whole scheme of economic life 



CHAP. Ill 



THE TAX SYSTEM 107 



were first altered, seem just that the man whose 
property was benefited by the grading and metalling 
of a street should be entirely free from The socialistic 

• -in _Ci_i "ii -oj_ income tax 

a special charge lor the special beneni. f asiUe & 
The scheme is inexpedient for three rea- unjust. 
sons : (1) it presupposes for its successful adminis- 
tration a method of distribution of wealth very 
different from that which the world now has ; (2) it 
demands a perfection in the technique of adminis- 
tration as yet absolutely unattainable ; (3) it would 
need, in order to be fairly administered, more hon- 
esty than men have yet shown in their dealings 
with the government. None of these reasons mili- 
tate in the least against the incorporation of an 
income tax in the tax system, beside other taxes. 
They apply only to its use as the sole source of 
income. 

But the second scheme, that of Henry George, is 
not only unjust and inexpedient, it is also not feasible, 
since it would not yield the necessary revenues. 1 
It is unjust because its fundamental concept, that 
land values are solely due to the presence The Georgian 
of a large number of inhabitants, is sin ff le tax 

rru f WOUld 7lOt 

untrue. I he value of land, like that yield sufficient 
of other wealth, depends on the use revenue - 
to which it may be put. Moreover, as improve- 
ments are not to be taxed, it would mean a 
heavier burden on farming lands than on city 

1 See Spahr, "The Single Tax," Political Science Quarterly, 
1891 ; Seligman, Essays, pp. 64-94. 



108 INTRODUCTION TO PUBLIC FINANCE part n 

property. But in no case would the scheme yield 
sufficient revenue. It has been estimated that if 
the entire annual rental of the land of England 
were appropriated by the government, it would fall 
$200,000,000, or £40,000,000, short of what is now 
needed to support the government. In the United 
States the matter is a little more difficult to esti- 
mate because it is not feasible to get a statement 
of the value of the land apart from the improve- 
ments thereon. Taxable real estate including im- 
provements is estimated by the Eleventh Census 
at 135,711,209,108. This was assessed at $18,956,- 
556,615. The value of the improvements is hard 
to estimate. Probably it is on the average at least 
two-thirds of the total value. But in order not to 
err on the side which favours our argument we 
will estimate the improvements at merely one-third 
of the total, which is certainly a moderate estimate. 
That would leave 123,807,472,739 as the highest 
value of the land. Suppose we take 3 per cent 
as the annual rental; we have $714,224,182 as the 
sum available for the single tax. Now the national 
government, the commonwealth governments, and 
the municipalities spend together over $915,954,055 
annually. That is, at the most favourable estimate 
the single tax would fall $200,000,000 short of what 
is necessary to maintain the governments. Mr. Spahr 
estimates that in Connecticut the assessed value of 
land increased $36,000,000 during a period in which 
$70,000,000 were paid in commonwealth and local 



chap, in THE TAX SYSTEM 109 

taxes. All of these figures, which err on the side 
of moderation, show conclusively that even in the 
United States no tax on land, alone, sufficiently 
large to pay the entire expenses of the government 
could be laid without appropriating enough to ruin 
the user of the land, and practically prohibit its 
cultivation. 

It may be urged that as the existing land taxes are 
regular charges, their capitalised value has already 
been deducted from the value of the land. But this 
would only be true if all the taxes now ^u taxes not 
fell upon the land. Most of the exist- capitalised 

and deducted 

ing taxes, however, fall upon other in the present 
sources of revenue and improvements. value °f land ' 
The abolition of all other taxes on different forms 
of property would also be unjust. This can be 
shown without abandoning the ground of the 
Georgian doctrine. Every kind of economic wealth 
may, under certain circumstances, and frequently 
does increase in value in such a way as to yield its 
owner an " unearned " increment. Why should that 
escape, and the " unearned " increment of land values 
alone be taxed ? 

Every tax tends to repress the development of the 
particular phenomenon on which it rests. . . , 

L r A single tax 

A single tax of any kind will tend to would defeat 
defeat its own ends by repressing the itsownends 

J x n by repressing 

existence of the phenomenon which the thing upon 
forms the signal for its assessment. For which based - 
example, in Mexico land is not taxed, but if the 



110 INTRODUCTION TO PUBLIC FINANCE part H 

farmer kills a cow, or sells a crop, he is taxed. 
Naturally this discourages any extension of the uses 
of land that involve this disagreeable consequence. 
The experience of nations which has led them to 
diversify the forms of their taxation is, therefore, 
supported by theoretical considerations. The tax 
system of the United States is still, and the tax 
systems of all European nations have been, until 
Tax sijstem of recently, and are yet in great measure, 
moc em net- mere accidental jumbles of different his- 

tions not logi- J 

cat torical taxes, which are retained simply 

for the revenue that they yield and not because of 
any belief in their justice. It is not often that 
nations are rich enough to enjoy what Professor 
Cohn has well called the " luxury of reform for re- 
form's sake." Their reforms have been most often 
undertaken for the sake of increased revenues. 

To be sure, the rough edges have been some- 
what worn away by the friction of economic forces, 
and the process of tax shifting has in some in- 
stances removed some of the worst injustices. But 
examined from the standpoint of some ideal sys- 
tem, the tax systems of many modern nations fail 
woefully. It matters little which ideal be the one 
held up by which to test them ; whether it be that of 
the benefit theory, or that of the faculty theory, the 
failure is the same. 

Sec. 2. What in the opinion of nations consti- 
tutes the ideal of correct or just taxation ? The 
answer to this question is to be sought in the 



CHAP. Ill 



THE TAX SYSTEM 111 



theories of taxation that have found favour, and 
are generally contained in the writings of econ- 
omists and financiers. The Physiocratic answer 
was, we have seen, inadequate. The benefit theory 
would say that each citizen should pay according to 
the benefit he receives. What is the benefit and 
how is it measured ? The common benefits are, 
clearly, the peaceful enjoyment of life, The benefit 
liberty, and property. The protection theor v cannot 

to fpi vp -iti • justify many 

the State affords to life and liberty is existing ex- 
theoretically equal for all, that to prop- emptions. 
erties varies directly as the property varies. 1 A uni- 
form tax on each poll for the first two benefits, and a 
proportional tax on property, would seem to answer 
the requirements of this theory with sufficient accu- 
rac}^. But the relatively small returns from the poll 
taxes and the great expense and friction of collecting 
them soon led to their partial abandonment. Prop- 
erty then remained the basis. The value of property 
seemed clearly to depend on its revenue-yielding 
power. It is a matter of comparative indifference 
which is taken. Hence the idea embodied in the 
famous dictum of Adam Smith: " The subjects of 
every State ought to contribute toward the support 
of the government, as nearly as possible, ... in 
proportion to the revenues which they respectively 

1 The "benefit theory has been illogically developed into a de- 
fence of progressive taxation. See Seligman, Prog. Tax., pp. 
110 ff. I have not included this illogical side in the discus- 
sion. 



112 INTRODUCTION TO PUBLIC FINANCE part U 

enjoy under the protection of the State." x But here 
again as the industrial population separated from the 
soil and a large body of citizens arose, who had no 
land and little personal property, and who could ill 
afford to part with any of their earnings, humanity 
and expediency urged the exemption of the mini- 
The exemption mum of subsistence. It cost too much 
m mo^l anc ^ cause d t°° much bitterness to collect 
sistence. taxes upon those having only the bare 

necessities. Then came Ricardo's suggestion, "the 
power of paying taxes is in proportion to the net, 
and not in proportion to the gross revenue." The 
items that were to be deducted were the costs of 
production, among which were then counted the 
bread and meat for the labourers, which were re- 
garded very much as so much fuel shovelled into the 
furnace of a human machine. Hence it was argued 
that it would be too burdensome to production to 
tax what was necessary to maintain the productive 
power of the workers. A certain amount of income, 
therefore, should be exempt ; for if taxed, the tax 
would certainly be shifted. Fortunately, according 
to the prevalent theory of wages, the amount to be 
exempted would remain fixed, or nearly so, advanc- 
ing, if at all, very slowly. So that all incomes over a 
fixed amount were to be taxed proportionally; since 
the benefit to such individuals as possessed incomes 
above the chosen minimum was supposed to be in 

1 Bk. V., Chap. II., Part II. On the various interpretations of 
this passage see Seligman, Prog. Tax., p. 94. 



CHAP. Ill 



THE TAX SYSTEM 113 



exact proportion to the amount in excess of the 
minimum. Stated broadly, this theory was as fol- 
lows. All taxes must be proportioned to benefit. 
Certain classes only are benefited, namely, those 
having income over a certain amount; that is, over 
the minimum of subsistence. They should be taxed 
on the amount above that minimum of subsistence. 
It would seem, then, that the money spent in pro- 
tection of the workers who lived on the minimum of 
subsistence was to be treated as if of benefit to the 
other classes. This puts the worker in the same 
category with the pauper for whom the State, from 
reasons of humanity, decides that it is worth while 
to care. With a clearer perception of the character 
of production and a realisation of the fact that the 
worker was a man the satisfaction of whose wants, 
even if they did not exceed the minimum of sub- 
sistence, was yet as important as the satisfaction of 
the higher wants of other classes, came a realisation 
of the inadequacy of this theory. It is now quite 
generally abandoned, except as the legal theory in 
America. 

Perhaps the best statement of the United States 
legal theory of what constitutes the just measure 
of taxation is given by Judge Cooley. 1 The le althe 
" If it were practicable to do so, the ory in the 

, -i • j i , i , -i , United States. 

taxes levied by the government ought 

to be apportioned among the people according to 

the benefit which each receives from the protection 

1 Taxation, p. 24. 



114 INTRODUCTION TO PUBLIC FINANCE part ii 

the government affords him ; bnt this is manifestly 
impossible. The value of life, liberty, and of the 
social and family rights and privileges, cannot be 
measured by any pecuniary standard ; and by the 
general consent of civilised nations, income or the 
sources of income are almost universally made 
the basis upon which the ordinary taxes are esti- 
mated. This is upon the assumption, never wholly 
true in point of fact, but sufficiently near the truth 
for the practical operations of government, that 
the benefit received from the government bears 
some proportion to the property held, or the reve- 
nue enjoyed under its protection; and though this 
can never be arrived at with accuracy, through 
the operation of any general rule, and would not 
be wholly just if it could be, experience has given 
us no better standard, and it is applied in a great 
variety of forms, and with more or less approxi- 
mation to justice and equality. But, as before 
stated, other considerations are always admissible ; 
what is aimed at is, not taxes strictly just, but such 
taxes as will best subserve the general welfare of 
political society." 

Benefit as a measure of taxation is therefore 
according to the admission of one of its strongest 
advocates inadequate. Only in special instances can 
benefit be directly measured. There, of course, it 
has been and will remain the basis of taxation, at 
least until the State shall decide that the special 
benefit has been merged in the common benefit. 



chap, in THE TAX SYSTEM 115 

Sec. 3. But the faculty theory, while offering 
some difficulties, is on the whole more satisfactory. 
The faculty theory is well illustrated by The faculty 
the history of the English poor law, to theor v iUus ~ 

trated by the 

which reierence has already been made. English poor 
At first the attempt was made to supply law - 
the wants of the poor by voluntary contributions. 
But it soon became apparent that all were not con- 
tributing "as God had prospered them." The idea 
that the support of the poor was a benefit to the 
other classes, except, perhaps, so far as almsgiving 
was supposed to ensure a man's salvation, did not 
appeal to the legislators. They anxiously avoided 
making the contribution compulsory because it 
would be hard to justify such a policy by point- 
ing to any benefit. But they felt that fairness 
demanded that each should contribute according 
to his ability. Indeed, this was their understand- 
ing of the Divine command upon which they were 
consciously acting. The Justices of Peace were, 
without any very definite instructions as to the mode 
of procedure, authorised to see that each person 
contributed fairly according to his ability. 1 

What then constitutes ability ? The original idea 
seems to have been that the possession of prop- 
erty constituted ability. But the value original idea 
of property depends upon its power to of faculty. 
yield the owner a revenue. If we consider landed 
property only, we find historically the greatest un- 
1 Ashley, Economic History, II., p. 360. 



116 INTRODUCTION TO PUBLIC FINANCE part n 

certainty as to whether men should be assessed 
according to some estimate of the salable value 
or according to its annual yield. This uncertainty 
The salable arose from the nature oi things. The 
va ue or t le salable value of landed property was, 

annual proa- r r j •> 

ace. of course, determined by the annual 

produce or revenue-yielding power. In the middle 
ages land was not salable property; hence, it was 
the custom to value it for purposes of taxation 
according to the annual produce, or the annual 
rental value, which was determined by the produce. 
The history of taxation in the American colonies 
is very instructive as to the method of determining 
what constitutes faculty or ability to pay. Here 
for the first time in history, or at least since the fall 
of Rome, was a country that enjoyed almost absolute 
free trade in land. When the Connecticut proprie- 
tors bought in fee simple lands in Vermont, which 
they had never seen, to be sold again on the same 
terms to settlers, whom they ' had never seen, often 
for prices which the same lands would not bring 
„ . , . to-day, they were doinsr what was not 

Free trade in J 7 J ° 

land in New possible in any European country at the 

England. , • i -i . • i ,i -n 

time and what is only partly possible 
in most of them to-day, i.e. selling land as one 
sells wheat or any other commodity. The New 
England colonists, therefore, had the choice of two 
methods of assessing property in land : they could 
follow the older method to which they were accus- 
tomed at home, which assessed the rental value of 



CHAP. Ill 



THE TAX SYSTEM 117 



the property, or they could take some method sug- 
gested by the fact that lands were really sold, in 
fee simple, for a price. In general they chose the 
latter, although there are numerous traces of the 
old method both in the tax laws and in other regu- 
lations that are of a similar character. It is un- 
fortunate that none of the investigations into the 
history of this period have been specially directed 
toward this point. Vermont furnishes one of the 
best examples of the principles underlying the colo- 
nial ideas of taxation. 1 There the conditions were 
very simple. Taxation was intended to cover all 
male inhabitants. Every male between „ .. , 

J Taxation of 

16 and 60 years of age, with a f eAv defi- faculty in 
nite exceptions, was "rated" at £ 6 on 
his person. That is, everybody was considered to 
be able to contribute something, whether he had 
property or not. Then the different items of prop- 
erty were " set in the list " over against the name 
of the owner at fixed rates. For example, each 
acre of improved land, 10s. ; an ox or steer four years 
old X4 ; three years old, £3; two years old, £2 ; 
one year old, XI ; a horse three years old or over, 
£3; all "horse kind" two years old, £2. Money 
on hand, or due, was listed at £6 in the £100. 
Then all persons were listed " for their faculty," 
according to occupation and earnings : attorneys 
at from £50 upwards, as the value of their prac- 

1 Wood, History of Taxation in Vermont. Columbia College 
Studies, IV. 3. 



118 INTRODUCTION TO PUBLIC FINANCE part n 

tice increased ; all tradesmen, traders, and arti- 
ficers "proportionally to their gains and returns." 
Other items of property Avere entered in the list 
in a similar way at fixed rates. The sum total 
of all the different items over against the name 
of each person was supposed to represent his total 
ability or faculty. The notable thing about all 
this is that only revenue-yielding property was 
listed. It was not a property tax purely, nor an 
income tax. But the thing which it sought to 
ascertain was how much ability or faculty each 
person had. All property that was regarded as 
indicative of faculty was listed, and many other 
things that were also indicative of faculty were 
included. Later, however, Vermont adopted a form 
more nearly in accord with the idea that property 
alone indicates faculty. 

There are then two ways of ascertaining faculty. 
In the one the base is primarily the property irre- 
F acuity meas- spective of the revenue the property 
wee y prop- yj[ e ^ s# j n ^\ ie ther it is income from 

erty or by J 

income. property or from other sources. There 

are, also, two ways of completing the measurement: 
We may assume that faculty is proportional to 
property or income ; that is, that it increases in 
exactly the same ratio as property and income 
increase. Or we may assume that it increases more 
rapidly than either property or income. The choice 
of base and the choice of rate have given rise to 
long and weary discussions and hair-splitting dis- 



CHAP. Ill 



THE TAX SYSTEM 119 



tinctions. In regard to the first, it is sufficient to 
say that at present the most widely accepted view 
is that, from the standpoint of abstract justice, 
income forms a better starting-point for the deter- 
mination of faculty than property. But we cannot 
avoid entering the discussion as to whether faculty 
is in proportion to income or increases Faculty in- 
more rapidly. The widespread advance ceases more 
of democracy, and of sympathy for those property or 
in the lower walks of life, led to the income. 
desire to justify if possible the exemption of smaller 
incomes, especially the minimum of subsistence, and 
this desire found means of fulfilment in the newer 
theories of value, the conception of final utility, and 
the discussion as to the relative urgency of different 
wants. If we classify certain wants as absolute 
necessities, then the conclusion is near that the 
possessor of the minimum of subsistence has no 
ability to pay taxes. The possessor of a great deal 
more than the minimum of subsistence can in pro- 
portion bear more taxes than one who has only 
enough to obtain a few comforts in addition to the 
necessities. That is, the test of justice is found in 
equality of sacrifice, and we impose a greater sacri- 
fice if we take away from the labouring man with 
$1500 a year 10 per cent of his iacome, than we im- 
pose on the capitalist with $15,000 annual income by 
taxing him in the same proportion. Moreover, if we 
look upon faculty as identical with general economic 
power, then it is clear that, as the control of wealth 



120 INTRODUCTION TO PUBLIC FINANCE part ii 

increases, the ease of further increase is greater. 
Thus it is easier relatively for the millionaire to 
double his fortune than it is for the daily wage- 
earner to rise to independence. 

Sec. 4. There are two other theories, which, inde- 
pendent of the idea of sacrifice or of increased 
The compen- economic power, attempt to justify a 
satoryand ^cthsx ra t e of taxation for higher in- 

sociahstic the- ° ° 

ones. comes than for lower. These two the- 

ories adopt the hypothesis that the common benefit 
is equal, and demand that the inequalities in wealth 
should be removed in order to make it easily possi- 
ble to tax according to this equal benefit. There 
are, first, those who argue that the inequalities in 
wealth are due in large measure to the action of the 
State, and hence the State is justified in abandoning 
the idea of equality of taxation and in taxing those 
who have much wealth more heavily than others, 
for they have gained from the State's own action. 
This has been called the compensatory theory. 
Others, again, starting from the same hypothesis, 
urge that taxation cannot be equal, because evil 
economic forces have changed the abilities of the 
tax-payers and that it is the duty of the State to 
offset these forces by readjusting wealth through 
taxation. This has been called the socialistic the- 
ory. Neither of these theories can justly be called 
scientific ; they both cut loose entirely from existing 
conditions. 

We cannot within the limits of this work attempt 



chap, in THE TAX SYSTEM 121 

an exhaustive criticism of all the different theories 
as to justice in taxation. Indeed, we have already 
exceeded the limits of pure scientific inquiry. But 
the conclusions reached by Professor e .. 

J oehgman s 

Seligman after an exhaustive study of conclusions as 
all the different theories are too impor- °P ro ff resszon - 
tant to be omitted. 1 He finds the benefit theory, 
like the socialistic and compensatory theories, wholly 
inadequate. But the faculty theory is satisfactory 
and seems to him to justify a moderate progression. 
Greater faculty is represented by the higher income: 
(1) because, after the initial disadvantages have been 
overcome, it is easier to acquire more ; (2) because 
the sacrifice of the same proportion of the larger 
income is less than in the smaller income. Neither 
of these reasons suggests a definite rate of progres- 
sion. He says : " If therefore we sum up the whole 
discussion, we see that while progressive taxation 
is to a certain extent defensible as an ideal, and as 
the expression of the theoretical demand for the 
shaping of taxes to the test of individual faculty, it 
is a matter of considerable difficulty to decide how 
far or in what manner the principle ought to be 
actually carried out in practice." 

It would seem, then, that, in general, faculty is the 
ideal base of taxation ; that faculty can be meas- 
ured either by property or by income, but best by 
the latter ; that faculty increases somewhat pro- 
gressively and is affected by the consideration of 
1 Prog. Tax. in Theory and Practice, pp. 190 ff. 



122 INTRODUCTION TO PUBIIC FINANCE part ii 

relative conditions, as the kind of property, the 
source of the income, or the burdens already resting 
,, ,., . upon the individual or property. All 

Modifying, * r r j 

relative con- these considerations have to be applied 
in determining whether the tax system 
of any country complies with the rules of justice . 
They do not apply with the same strictness to the 
separate taxes. 1 

1 The recognition of the principle of progression in the recent 
reforms of taxation is very marked. See Seligman, Essays, 305 ff. 



chap, iv DEVELOPMENT OF TAXATION 123 



CHAPTER IV 

THE DEVELOPMENT OF TAXATION BEFORE THE 
INDUSTRIAL REVOLUTION 

Section 1. Feudalism placed a large number of 
economic receipts directly in the hands of the rulers. 
These receipts were generally sufficient T 
for the discharge of the customary pub- found under 

v ,. ... T , • • . i ,-i p feudalism. 

he activities. It is a mistake, therefore, J 
to search for taxes proper in the period of the 
supremacy of feudalism; that is, from the capitulary 
of Charles the Bald, 877, to the end of the thirteenth 
century. Taxes begin to emerge with the transfor- 
mation of feudal rights and dues, the commutation 
of obligatory military services, and the like into pay- 
ments in kind or in money, Greek and Roman 
forms of taxation had even less influence on modern 
systems of taxation than Greek and Roman forms of 
expenditure on modern spending. For the study of 
Roman law and the traditions of the glory of the 
Roman Empire determined many State activities that 
involved the spending of public wealth. But new 
methods of obtaining the funds were devised. Infor- 
mation concerning the taxes of the period from the 
fall of Rome to the capitulary of Charles the Bald is 
rather meagre and too vague to be of much value. 



124 INTRODUCTION TO PUBLIC FINANCE part ii 

The first taxes to emerge from the darkness of 
this period are a number of fee-like contributions of 
„ 7 , the nature of commuted feudal services, 

Early taxes 

were commut- or directly connected with feudal rights, 

ed feudal dues. ■ • -i . i i • i •• 

certain market dues and customs duties, 
tolls for protection to travellers, for the use of roads, 
bridges and ferries, and two forms of property taxes, 
land taxes and family taxes. The land taxes of this 
period are just emerging from the character of rent 
payments and acquire only by degrees the features 
of pure taxes. Even in the case of land left to the 
original possessors after conquest, the payments de- 
manded are more of the character of rents than of 
taxes. But the combination of these charges with 
hearth or family taxes leads to the formation of a 
sort of mixed property and personal taxes. The fact 
that land is practically the only kind of revenue 
yielding property and that no considerable earnings 
are made without the use of land makes this tax suf- 
ficiently universal for the demands of justice. 

Direct taxes are in this period, as in classical times, 
never paid by the freeman. They are regarded as 
The freeman derogatory and as the badge of a servile 
exempt. position. The freeman could give his 

services to the State, he could risk his life for it, but 
he would regard it as a deadly insult if he were 
asked to pay taxes. Indirectly, of course, he was 
taxed, as, for example, when he bought merchandise, 
for permission to sell which the trader was taxed. 

As soon, however, as industry began to develop, 



chap, iv DEVELOPMENT OF TAXATION 125 

as soon as the crafts sprang up in the cities which 
clustered around the market-places, and classes which 
had lived in part from industrial pursuits found it 
possible to obtain so wide a market that they could 
live entirely from their industry, then, there arose 
such a differentiation of the sources of wealth that 
the old forms of taxation were insufficient. Tax- 
ation had, therefore, to be extended to Taxation ex- 
meet the new forms of wealth. The first en ec , ° mee , 

new forms of 

methods of taxing these were dictated wealth. 
solely by expediency and the desire of obtaining as 
large revenues as possible, rather than by any defi- 
nite ideas of justice, and were mainly indirect in 
character and partly an extension of the older market 
dues, excises, customs, and tolls, together with new 
taxes of the same kind. 

Of old Roman taxes none can be strictly said to 
have survived the conquest. Some lasted through- 
out the Merovingian period in a greatly changed 
form. Finally they were merged into various feudal 
payments, and took on the nature of rents. A few 
relatively insignificant market dues and fees con- 
stitute the only taxes which regularly formed a part 
of the revenues of the State or of the State's officers, 
the feudal lords. The regular feudal burdens, while 
economic in character and not fiscal, Feudal dues 
really fill the place of the later direct /"™ «*«■*» 

J r as heavy as 

taxes. In proportion to the prosperity taxes. 

of the people they were certainly as heavy as any 

modern systems of taxes. The rapid disintegration 



126 INTRODUCTION TO PUBLIC FINANCE part n 

of the German Empire into smaller territorial lord- 
ships after the sixteenth and seventeenth centnries, 
rendered the question of imperial taxation at once 
less pressing and more complicated. On some eleven 
different occasions, according to Wagner, between 
1427 and 1550 the Empire as such stood in need of 
extra revenues, for purposes so clearly of common 
benefit as to justify a demand for common contri- 
ve " com- butions. Such an instance is that of 
mon penny." the Hussite and Turkish wars. The 
tax used was the "common penny." This direct 
imperial tax was a mixture of poll and personal 
taxes with income and property taxes. We find 
very similar taxes in France and England. It fell 
upon all imperial subjects, whether holding from the 
crown or not, provided they held property. The 
rate was an irregular regressive one, being smaller 
for all above a certain amount of property. It was 
very badly administered and not universally col- 
lected. 1 

In the German principalities that were formed out 
of the German Empire the first direct taxes were 

the bedes. These were extra payments, 

The"bedes." . ._ . p . . . p ' , 

similar in form to the existing feudal 

contributions. They were made by those already 
paying such dues and were measured in somewhat 
similar ways. The basis was generally landed prop- 
erty. The first bedes were more or less voluntary, 
private contributions for the support of the Vogt, 
1 Cf. Wagner, Schonberg's Handbuch, 3d ed., III., 184. 



chap, iv DEVELOPMENT OF TAXATION 127 

count, or lord for some recognised public purpose. 
By contracts entered into between the contributors 
and the lords, they became compulsory and formed 
part of the regular income of the lords, who then in 
extraordinary cases of need would again come for- 
ward with the demand for extra or "necessity" 
bedes. This was frequently done in times of war. 
Hence, these bedes were often called " army bedes." 
Some of these in turn became customary or fixed. 
With the rise of the idea of public life and public 
needs, the bedes easily became compulsory public con- 
tributions, and were regarded as distinct from the 
feudal dues, which by virtue of longer standing and 
the absence of a recognised public purpose were 
treated as the private revenues of the prince. A 
peculiarity of the earlier assessments of the bedes was 
the method of apportionment to, or assumption by, 
the different orders or cities of a certain lump sum, 
which was then distributed by their own rulers 
among the different members, according to some 
measure agreed upon. Prelates, clergy, "Donative 
and knights were exempt from the ordi- monies." 
nary bedes. They sometimes rendered similar con- 
tributions, hedging themselves in with all sorts of 
reserves and precautions, to prevent the payments 
becoming regular. These were called " donative 
monies." 

It was in the cities that retained a large degree 
of political independence that the highest develop- 
ment of the fiscal system was to be found in the 



128 INTRODUCTION TO PUBLIC FINANCE part n 

middle ages. This is owing to the fact that they 
were in advance of the rest of the country in their 
„.. , , . economic development. Loner before the 

High develop- r & 

ment of city principalities were able to abandon pay- 
jinances. ments in kind and services, the cities 

were collecting taxes in money, making some use of 
public credit and developing regular fiscal offices. 
"The art of taxation," says Wagner, 1 "the use of 
public credit, and the practical organisation of the 
financial administration in the cities had been an 
important part of public institutions for centuries 
before the territorial State had even recognised the 
need of such." This field has, however, not yet 
received the attention of historical investigators 
sufficiently to allow us to draw conclusions as to 
the generally prevailing forms. 2 

Sec. 2. In France the early growth of a strong 
central power led to an intensification and sharp 
differentiation of the royal feudal dues from the 
other feudal charges, which gives them something 
Royal feudal the character of taxes. But inasmuch 
dues in as ^ e French State was peculiarly a 

France not . 

properly proprietary State, and the territory was 

taxes. rather a part of the private property of 

the king than public property in the modern sense, 
these early charges are not taxes proper, but rents, 
or, to use the more general term, feudal dues. But 
the rapid growth of the central power, and the high 

1 Schonberg's Handbuch, 3d ed., III., 185. 

2 See Schonberg's " Investigations into the City of Basel." 



chap, iv DEVELOPMENT OF TAXATION 129 

development of public needs in the kingdom, neces- 
sitated more revenues. These needs were at first 
met by the collection of indirect consumption and 
trade taxes. The tendency toward the development 
of indirect taxes grew apace after the seventeenth 
century. The mercantile theory, which was su- 
preme for most of the time after Colbert, developed 
customs duties very highly, and these ran par- 
allel with internal consumption taxes. In the 
eighteenth century there were three, or possibly 
four, important taxes which had grown up in vari- 
ous ways out of the feudal dues. These were the 
"taille" 1 (tallage), the " vingtiemes" (twentieths), 
the " capitation " (poll), and possibly the " dimes " 
(tithes). 2 

The taille is of feudal origin. Originally it was 
arbitrarily assessed with extreme rigour upon the 
serfs by the lords, and occasionally upon the great 
vassals by the king with the assent of the peers. It 
became a permanent charge when royal power was 

1 The term "taille," in English, tallage, also spelled talliage, tail- 
age, and taillage, is from a root meaning to cut. It is explained as 
derived from the general method of keeping accounts by means of 
notched sticks. A taille was any sum of which account was kept, 
then the amount scored up (tallied) against any person. Slender 
sticks with notches called "tally sticks" were used by the English 
exchequer for accounts, until abolished by the statute of 28 Geo. 
■III., c. 82. Similarly, the German "Kerbe," tally sticks. Other 
roots meaning to cut are common in the names of various taxes : 
viz., incisio, incisura, cise, later accise, adcisio, Eng. excise ; in 
these Latin roots the thought is, that a part of the taxed article is 
cut out for the government. 

2 See Vignes, Ed., Traite des Impots en France, 1872, p. 10. 

K 



130 INTRODUCTION TO PUBLIC FINANCE part n 

firmly established on the ruins of feudalism. Charles 

VIII. made it permanent at the same time with the 

establishment of the royal army. The 

The taille. 

taille was both real and personal. On 
the one side it was based on the revenue from landed 
property ; on the other, it was based on the faculty 
of the tax-payer, measured by the revenues from his 
landed property, and active rents, as well as the prod- 
ucts of his own industry. This tax, suppressed in 
1790, yielded 44,737,800 livres the year before. 
Necker obtained 91,000,000 livres from it. Nobles 
and clergy were exempt. 

The vingtiemes consisted of one or more twentieth 
parts of the revenues from either landed or movable 
property. This tax had a varied history. At first 
it was used with the taille, but when that tax was 
Thevingti- made permanent under Charles VIII. 
emes. -^q vingtieme disappeared. It was re- 

vived in 1710 by Louis XIV. as a war tax. It 
remained as the occasional resource of the treasury 
up to the Revolution. Only the clergy were ex- 
empt. It produced 46,000,000 livres (Necker 55,- 
000,000). 

The capitation, or system of poll taxes, was the 
variable tax of the ancient monarchy. It dates 
The capita- from 1695. It was at first regarded as a 
tion - temporary expedient, but was continued 

to the Revolution. It was assessed according to a 
tariff of twenty-two classes. But the base was fre- 
quently changed. The clergy were exempt, the 



chap, iv DEVELOPMENT OF TAXATION 131 

nobles were taxed on the basis of their presump- 
tive ability, and those who paid the taille were 
taxed according to the amount of that tax they 
paid. In 1786 it yielded 41,500,000 livres. 

The dime, or tithe, was an assessment paid in kind 
from the fruits of the soil for the benefit of the 
clergy. The tax was not always the 

. The dime. 

tenth, but varied from one-seventh to 
one thirty-second. The ecclesiastical purpose of 
this payment has led some to refuse to call it a 
tax in the strict sense. Since the church exercised 
a power that differed little from that of the State 
and the burden was a regular one maintained for a 
public purpose, it should probably be called a tax. 

The eorvees were more strictly taxes than the 
dimes. These were personal services applied to the 
construction of the roads and other pub- 
lie works. They were regarded as feu- 
dal dues. They were of two kinds : the first were 
levied on property and rendered by the proprietor for 
his lands, and the second were levied on persons and 
rendered by all irrespective of land-holding. The 
nobles and the aliens were not subject to the per- 
sonal eorvees. The clergy could commute them into 
money payments or have them rendered at their own 
cost. The land eorvees were due from all hereditary 
proprietors irrespective of rank, but they were not 
bound to furnish them in person. Louis XVI. sup- 
pressed the eorvees in 1776, but they were re-estab- 
lished. They disappeared in 1793. 



132 INTRODUCTION TO PUBLIC FINANCE part n 

The most important indirect consumption taxes 
were leased for 166,000,000 livres^ and those collected 
T ,.' by the government were 51,500,000 livres. 

Indirect con- J ° 

sumption These together nearly equalled the 
revenue from direct taxes. The indi- 
rect taxes of the ancient monarchy were : first, the 
aides, which consisted of taxes on drinks, on articles 
of gold and silver, on iron, oil, skins, starch, bills, 
paper, etc., and the octrois, levied at the city gates 
on all sorts of goods when brought into the towns ; 
second, the gabelle, or salt tax, which was so ar- 
ranged as to amount practically to a direct tax. 
For the people were obliged to buy each year from 
the management of the monopoly an amount of salt 
determined in each case by the size of the family. 
There was a similar " salt conscription " in Germany. 
Thirdly, there was the tax on tobacco. 

Sec. 3. In England 1 we find in Anglo-Saxon 
times three principal taxes : (1) The ship-geld, a tax 
Early English imposed on each shire, in proportion to 
taxes. the number of hundreds it contained, for 

naval purposes. (2) The tribute-like "Danegeld" 
was levied after 991 at so much a hide (piece of 
land) and, after the cessation of the original cause, 
was collected by the kings as private revenue. 
(3) The "fumage," or tax of smoke farthings, a 
hearth tax. This seems to have been a traditional 
form of tax with the Saxons. 

In Norman times, the feudal character of the gov- 
1 See Dowell, History of Taxation and Taxes in England. 



chap, iv DEVELOPMENT OF TAXATION 133 

ernment was such that it obtained revenues from 
the demesne, from feudal dues, and from the royal 
prerogatives so great that no real taxes exist. The 
Danegeld was levied by the Conqueror as an annual 
tax, but disappeared after 1163. 

With the reign of Henry II. came a more ordered 
and regular system of taxation. This began with 
the well-known commutation of the mili- „ 

Commutation 

tary obligations of tenants. It was due of military 
to the continental position of the Ange- seimces ' 
vin kings. The distance at which war was waged 
and the length of service demanded rendered the 
military obligations particularly burdensome, and 
tenants were anxious to commute them. An army 
of mercenaries, too, suited the king better, as easier 
to control than the feudal army. Hence arose the 
commutation of the duty to foreign service into a 
money payment of two marks, £1 6s. 8<i., on each 
fee of X20, known as the "scutage." Henry II. col- 
lected three such scutages, and this tax did not 
fall into disuse until after 1322. It was practically 
a land tax, levied each time for a special purpose. 
The tallage in England was the tax that was col- 
lected from the tenants on the royal demesne on 
occasions of unusual expense. Those 

The tallage. 

who paid the hidage or Danegeld were 
generally exempt. Cities and towns not exempt in 
this way paid the auxilium or aid. The tenants 
were liable for these taxes up to one-tenth of their 
goods. In the city of London the tallage was 



134 INTRODUCTION TO PUBIIC FINANCE part n 

treated as a "benevolence." It was superseded 
after Edward III. by the general taxes on mova- 
bles. 

The taxes on movables began with the " Saladin 
tithe " in 1188. It was one-tenth of rent and mov- 
_ . • . . ables paid by all except crusaders. Out 

Thebeginning r j r 

of taxes on of this insignificant beginning grew a 
system of taxes on movables which finally 
included all the taxes so far mentioned. Richard I. 
levied a tax on all ploughed land in 1194, known as 
the "carucage," from the area upon which it was 
levied, namely, the amount of land that could be 
covered by one plough (cariica) in a season. After 
1224, this was merged in the tax on movables. 

The tax on rents and movables, which began, as we 
saw, with the Saladin tithe, was continued from 1189 
™ ,.,-,. to 1334. This was a grant of one-thir- 

The "thir- & 

teeiiths and teenth in 1207, one-fifteenth in 1225, one- 
fifteenths." fortieth in 1232 , one-thirtieth in 1237, 

one-fifteenth in 1275. Up to 1283, the method of 
obtaining the grant was by separate negotiations 
with each section of the country. But after that 
date, general grants were made by Parliament and 
other taxes were discontinued. 

'Besides these direct taxes, the crown had the 
privilege of taking " customary" tolls upon merchan- 
Customs dise imported or exported. Hence our 

duties. modern term, "customs duties." These 

tolls were of the character of licenses and protec- 
tion money. Their early history is obscure. Be- 



chap, iv DEVELOPMENT OF TAXATION 135 

fore the Magna Charta they had become so fixed 
and regular as to call forth the well-known clause 
of that historical document : " Let all merchants 
have safety and security to go out of England, to 
come into England, and to remain in and go about 
through England, as well by land as by water, for 
the purpose of buying and selling, without the pay- 
ment of any evil or unjust tolls, on the payment of 
the ancient and just customs " (sine omnibus malis 
toltis, per antiquas et rectas consuetudines) . In 
1275 these " ancient customs," slightly raised, were 
granted Edward I. by Parliament. The chief duties 
were on wine imported and wool exported and a 
poundage on all other goods imported or exported. 
From 1334 to 1453 there are a number of changes 
to note. The fifteenths and tenths were appor- 
tioned among the communities, cities, and boroughs, 
the townships and the demesne tenants, Th lifjf 
in 1334, and the assessment then made teenthsand 
remained the basis of taxation. The tent s ' 
tax thus became a fixed charge. It varied in 
rate from one -half a fifteenth and tenth, to two fif- 
teenths and tenths, as the need for revenues might 
change. Sometimes no such grant was made. In 
1377 Parliament granted to the king a tax of " four 
pence, to be taken from the goods of each person in 
the kingdom, men and women, over the The "tallage 
age of fourteen years, except only real °f groats." 
beggars." This was known as the "tallage of 
groats." Subsequently a classified poll tax was 



136 INTRODUCTION TO PUBLIC FINANCE part n 

employed, in which an attempt was made, by the 
arrangement of the payers into classes and a grada- 
tion of the rates, to get a larger return by taking 
advantage of the greater wealth of certain classes. 
In 1379 this yielded X25,000, which was only slightly 
more than the previous tallage of groats. The 
clergy were included in both these taxes. After the 
peasant revolt return was made to the fifteenths and 
tenths. From 1382 the landowners take the whole 
burden of the old "fifteenth and tenth." In 1435 
this was supplemented by a graduated tax on in- 
come from lands, rents, and annuities, and offices of 
freehold. In the reign of Edward III. the customs 
yielded large returns. They consisted as before of 
tunnage on wine, customs on wool and leather, and 
poundage on all other merchandise. The popu- 
larity of Edward IV. enabled him to add to his other 
sources of revenue the " benevolences," demands 
"Benevo- on the r i cn f° r special contributions. 
lences." Throughout the history of taxation in 

England the grant of monopolies of new industries 
was made a source of income to the government. 
The multiplication of these under Elizabeth did not 
yield much revenue, although it gave rise to much 
discontent. 

There is little in the varied application of these 
taxes that is important as showing the line of de- 
velopment until the seventeenth century. At that 
time they proved unequal to the task of meeting the 
growing needs of the treasury. The chief auxiliary 



chap, iv DEVELOPMENT OF TAXATION 137 

lay in the extension of the indirect consumption 
taxes. The year 1692 (revision, 1697) saw the 
establishment of a permanent land tax. Theperma- 
This grew out of the apportionment of nent land tax - 
the "fifteenths and tenths." It became a fixed 
charge on land, a real burden, not having, as time 
went on, any definite relation to the income from 
land. In 1798 Pitt made this redeemable, a privi- 
lege which has been taken advantage of to the ex- 
tent of removing half the charge from the lands. 
In its operation it is rather a rent than a tax. 

The wars of the period of the French Revolution 
and the consequent need of revenue introduced the 
general income tax (1798, 1802, 1803, The income 
1806). This tax was no departure in tax - 
principle from the older taxes, although a departure 
in method. It has been well characterised as a com- 
bination of several taxes into a system which has for 
its aim the proportional taxation of all incomes, with 
the exemption of a certain fixed sum (digressive). 
The form which it took in 1803 is the best to study. 
Two separate acts were passed, the one taxing all 
incomes from holdings of real estate, rents, and pub- 
lic salaries at the source ; that is, so far as possible 
the tax was deducted before the revenues passed 
into the hands of the recipient. The second taxed 
industrial earnings and interest on capital on the 
basis of a declaration by the tax-payer. The tax 
began with an income of £60 (later £50), and this 
amount could be deducted from all incomes below 



138 INTRODUCTION TO PUBIIC FINANCE part n 

£150 ; after that the full rate was paid. Each per- 
son was required to declare his whole income and 
could claim reimbursement for any tax stopped at 
the source if he could show that his total income 
was below the minimum. This tax, set aside in 
1816, was restored in 1842, as a substitute for the 
indirect taxes, removed in consequence of the de- 
mand for commercial freedom. The rate is changed 
from time to time as the needs of the government 
change. 

Sec. 4. Local taxation in England has been 
partly independent of royal taxation. England 
has not followed the continental plan of collecting 
revenues for local purposes in the form of additions 
The poor rate to the national taxes. While the weight 
eprooype Q £ na ti nal taxation fell upon customs 

of local taxes r 

in England. duties, excises, and certain direct taxes, 
measured roughly by income, local taxation was 
based exclusively upon revenues from real estate. 
The prototype of all local taxation was the poor 
rate. Previous to the reign of Elizabeth local ac- 
tivities were of such a character that they could 
be discharged from feudal dues. In the manorial 
villages and the boroughs with semi-feudal guild, 
and close corporation governments, which owned 
landed property, feudal incomes paid the few public 
expenses. But the removal of the monasteries, hos- 
pitals, and other charitable foundations, threw upon 
public charity a number of well-developed paupers ; 
and the rapidly changing character of industry and 



chap, iv DEVELOPMENT OF TAXATION 139 

of economic life constantly gave rise to the problem 
of what to do with the unemployed, who at times 
became very numerous. The result was the famous 
poor law of 1601. The principle of the tax for the 
support of the poor had been of slow growth. In 
the reign of Henry VIII. the giving of alms was 
prohibited, and collections for the impotent poor of 
the parish were required to be made in each church. 
In 1547 the Bishops were authorised to prosecute 
all persons who refused to contribute for this pur- 
pose, or should dissuade others from contributing. 
In the fifth year of Elizabeth the Justices of Peace 
were made judges of what constituted a reasonable 
contribution for this purpose. After 1572 regular 
compulsory contributions were levied. Out of a 
purely voluntary contribution then, there emerged 
in two-thirds of a century a compulsory tax. The 
basis of this tax was the annual rental value of 
real property. The tax was collected not from the 
owner but from the occupier. Most of the other 
taxes for local purposes which have developed in 
England since then are of the same general char- 
acter. They are too numerous to mention here. 
Besides the direct taxes, there were a few indirect 
ones, market dues, road tolls, coal and wine duties. 
Sec. 5. In the American colonies we Peculiar con- 
meet with entirely new conditions. Pub- dJ f ions in th \ 

J American col- 

lic needs were simple and few, and were onies. 
mostly local in character. Customs duties were for 
the most part controlled by the mother country in 



140 INTRODUCTION TO PUBLIC FINANCE part n 

the interests of her general colonial policy. So the 
colonists were driven to other forms of taxation. 
Practically free trade in land existed. Land at a 
known selling value early formed a large part of 
the property of each citizen, and differed in no 
essential particular from his other property. There 
were in some colonies, to be sure, charges of a feudal 
nature known as quit rents, which were a recogni- 
tion of the king's interest in the land. 

Oliit V&YitS 

These never became of fiscal importance, 
and never developed into taxes. Nor do they seem 
to have ever seriously modified the essentially free 
character of land-owning, since they were so irregu- 
larly and meagrely collected. They were* " acknow- 
ledgments His Majesty receives of the People's 
Tenure and Subjection." 1 At times they devel- 
oped into an apparent tax on certain lands. They 
seldom formed a part of the revenues of the colonial 
treasuries, being generally payable to the king. 2 

Just as there were three different forms of gov- 
ernment among the colonies, so there were in the 
The Neio beginning three different tendencies in 

ng an ax taxation. 3 New England began with a 

on property ° ° 

and faculty, tax on property and faculty. The Gen- 
eral Court of Massachusetts laid down in 1634 the 
following principle : " In all rates and public charges 

1 Spottiswood Letters, quoted by Eipley, Financial History of 
Virginia. 

' z See Wood, History of Taxation in Vermont, p. 13. Also 
Schwab, History of the New York Property Tax. 

3 Cf. Seligman, Essays, pp. 19 ff. 



chap, iv DEVELOPMENT OF TAXATION 141 

the towns shall have respect to levy every man ac- 
cording to his estate, and with consideration all 
other his abilities whatsoever, and not according to 
the number of his persons." 1 Later, however, poll 
taxes were used, and the general property tax was 
extended to cover property in the process of acqui- 
sition, or the earnings of labour. In all the New 
England colonies the resulting system was practi- 
cally as follows : Each person was to contribute as 
he was able. Ability was measured, first, by prop- 
erty, real and personal ; secondly, by the T] N 
person himself ; thirdly, in the case of England sys- 
wage-earners, merchants, and others, by tem ' 
earnings. With a few notable exceptions, as in the 
case of lawyers, the third measure of ability grad- 
ually fell into disuse. It has been repeatedly 
pointed out 2 that the New England people had the 
habit of saving. All earnings were soon turned 
into property. So that the demands of justice 
were fully met by the general property tax and 
the poll tax. In addition to these direct taxes, 
there were a number of indirect taxes, " imposts," 
some collected in the form of licenses, and many as 
excises. 

In the Southern colonies, of which Virginia will 
serve as a model, the first taxes were the poll taxes. 
" Personal responsibility," says Mr. Ripley, " was 

1 Massachusetts Kecords, quoted by Douglas, Financial History 
of Massachusetts, p. 18. 

2 Walker, « The Bases of Taxation," Pol. Sci. Quar., Vol. III. 



142 INTRODUCTION TO PUBLIC FINANCE part il 

thus the basis of taxation at first, but as the burden 
of taxation became heavier this liability was partly 
„. . . 77 transferred to real estate." 1 This trans- 

Virginia poll 

taxes arid cus- f er of the burden to real estate began 
with the practice of making the per- 
sonal tax a lien upon the property of absentees, or 
of persons dying before the payment of the tax. 
The general property tax in a form like that in 
use in New England did not exist in Virginia be- 
fore the Revolution. The grossness of the poll tax 
was modified by some reference to the different kinds 
of property owned. In consequence of the failure 
to develop a good system of direct taxes Virginia re- 
sorted to indirect taxes, export duties on tobacco and 
hides, import duties on liquors and slaves, and some 
general tunnage duties forming the main features. 

The third or central system is fairly represented 
by New York. There, under the West India Corn- 
ice™ York ex- P an y> 1621-1664, taxation first took the 
cises - form of moderate indirect taxes on goods 

imported and exported and imposts on the consump- 
tion of beer, wine, and spirits. It was after the 
passage of the colony into the hands of the English 
that attempts were made to develop the property 
tax. The actual existence of this tax begins with 
the formation of the Assembly after 1683. 2 

1 Financial History of Virginia, p. 21. 

2 See Schwab, Die Entwickelung der Verm'ogensteuer im Staate 
New York, Jena, 1890. Also Schwab, History of the New York 
Property Tax, Pub. of the Amer. Econ. Assn., V., 5. 



chap, iv DEVELOPMENT OF TAXATION 143 

In all parts of the United States after the Revolu- 
tionary War the main reliance for local revenue was 
the general property tax. The commonwealths, as 
such, had little need for revenues until after 1840. 
In the formation of the Union indirect taxes were 
made the prerogative of the federal government, so 
that the commonwealths had to resort to other 
means. The character of direct taxation in the 
United States since the formation of the Union will 
be treated in the next chapter. The differences in 
the forms of taxation in the different parts are due 
both to political and economic differences. 



144 INTRODUCTION TO PUBLIC FINANCE part ii 



CHAPTER V 

THE DEVELOPMENT OF TAX SYSTEMS SINCE THE 
INDUSTRIAL REVOLUTION 

Section 1. The trend of the development of 
taxation was abruptly changed by the industrial 
Changes in revolution at the close of the last cen- 
taxation due tury. On the one hand, the development 

to the Indus- . . . 

trial revolu- * constitutionalism, vesting, as it did, 
Hon. -the control of the purse in the people, 

and especially in the tax-payers, had the inevitable 
effect of changing the ideas underlying the tax 
systems. New ideas as to the justification of taxa- 
tion developed, and with them a tendency to seek 
new measures of taxation. On the other hand, the 
rapid increase in wealth, the growth of new forms 
of wealth, such as invested capital, the birth of new 
kinds of property, as the many kinds of credits, 
and the rapid change in the distribution of wealth 
among the different classes in the community, — 
all of these and other similar causes led to the 
constant extension of taxation to the new forms. 
Old taxes which were well suited to certain simpler 
conditions of society become under new conditions 
unjust, and give rise to dissatisfaction, to many 
attempted and some accomplished reforms. These 



chap, v DEVELOPMENT OF TAX SYSTEMS 145 

reforms in turn prove no more satisfactory in the 
long run, for the conditions they were intended to 
meet change again. 

Just as the attention of economists was chiefly 
directed to the study of productive agencies during 
the first three-quarters of the century, 
so the general tendency of the same the agents of 
period in finance may be broadly charac- pr0 uc l0n ' 
terised as an attempt to compel the different agen- 
cies of production to contribute to the support of 
the government. It is claimed that economists 
have, during the last two decades, turned their 
attention more to the consideration of questions of 
distribution, and it is certainly true that the most 
recent tax reforms have been in the direction of 
securing a better division of the burden among the 

sharers of the new wealth rather than m . 

Taxation of 

among the producers thereof. Subor- the shares in 

j- , , ,1 • , -i • distribution. 

dmate to this tendency are various pro- 
posals and attempts to alter the distribution of 
wealth by the use of the taxing power. 

The demands upon the revenues increased vastly 
during and immediately after the period of war 
which followed the French Revolution. Large debts 
had been accumulated; great armies and navies 
claimed support even in times of peace. Effect of tran- 

-vt j> >• i • 1 1 j sition to a 

JN ew functions were being thrust upon tt M Mt nnnm 

& *• money econ- 

the governments. Moreover, the new omy." 
economic era demanded the payment of all charges 
upon the State in money and necessitated the col- 



146 INTRODUCTION TO PUBLIC FINANCE part ii 

lection of revenues in money. The old feudal 
receipts and services became more and more inade- 
quate; new industrial receipts were, in general, not 
calculated to be much larger than the sums neces- 
sary to support the service or institution which 
furnished them. Consequently, taxation on an ever 
increasing scale becomes the basis of all State 
finances. Taxation is no longer regarded as a 
temporary expedient to meet passing and extraor- 
dinary needs. It is admittedly a necessary and 
permanent policy. 

The doctrine of political equality when generally 
accepted leads to a demand for universality and 
Effects of polit- equality of taxation. The difficulties 
ical equality. that arise are no longer as to the justi- 
fication of taxation in general, but as to the justice 
of certain forms and measures of taxation. The 
main question is, what is equality, and what the 
best method of attaining it. The methods and 
direction of reform were necessarily prescribed 
by the constitutions of the various countries and 
differ much from land to land. Different economic 
and social conditions have also an inevitable effect. 
Among the constitutional features that determine 
the direction of taxation the following may be 
mentioned. First, federal governments have gen- 
Federai gov- erally been excluded from the field of 
emmentsre- direct taxation. The central govern- 

sort to indirect ° 

taxes. ments of the German Empire, Switzer- 

land, and the United States depend for revenues 



chap, v DEVELOPMENT OF TAX SYSTEMS 147 

from taxation on customs duties and internal ex- 
cises. The sense of loyalty to the central govern- 
ment is inferior to that to the commonwealth 
governments so far as willingness to contribute 
directly to its support is concerned. The partial 
concealment or at least lack of prominence of the 
indirect contribution permits of its collection with- 
out calling the attention of the contributors forcibly 
to the fact that they are taxed by a new authority. 
Just that advantage of partial concealment in this 
tax which appealed so strongly to the monarchies, 
before the birth of political consciousness on the 
part of the people, appeals to the federal govern- 
ments. At the same time the practical necessity 
of uniform rates over the whole country, which 
arises from the fact that these taxes disturb the 
economic balance of industry and commerce, and 
the greater ease of administration with a larger 
territory and a single boundary, make it advisable 
to put all of them in the hands of the central organ. 
It was the latter considerations in regard to custom 
duties that led to the establishment of the Zollverein 
and eventually of the German Empire. 1 

On the other hand, the different States of which 
the federal governments are composed have shown 
themselves inclined to restrict their taxation to the 



1 See Bowring's Report on the Prussian Commercial Union, 
Parliamentary Documents, 1840, Vol. XXI., pp. 1-17. Reprinted 
in Rand, Economic History, p. 170. Also Legoyt's La France et 
Vfitranger, Vol. I., pp. 250-255 ; ibid. 



148 INTRODUCTION TO PUBLIC FINANCE part n 

direct taxes, leaving all but a few of the indirect 
ones to the central governments. 

But this separation of the assessment of direct 
and indirect taxes between different authorities has 
Difficulties been productive of great difficulties. 
which arise p or it is impossible to assess any tax 

from a divi- . 

sionofthetax- J us tly an d equally without reference to 
ing power. £} ie other burdens already imposed on 
the contributors. It would seem that the demands 
of justice which dictate that the whole system of 
taxation should work toward a definite and single 
purpose, will necessitate either the co-ordination of 
these forms or the placing of both of them in the 
hands of the same authorities. The proper co- 
ordination of all taxes is hard to accomplish when 
the taxing power is in different hands. This is one 
of the hardest problems of American taxation. 

The development of direct taxation will now be 
traced in detail by reference to some of the more 
important countries. Indirect taxes cannot prop- 
erly be said to have undergone any process of 
development. Many changes have, indeed, been 
made, dictated by different economic theories and 
purposes. But it has been simply a flux backward 
and forward. Sometimes ulterior aims, as protec- 
tion, have been abandoned and strict fiscal principles 
allowed sway. In those cases we find a simplifica- 
tion and a decrease in the number of articles taxed. 
But no general principles have been developed. 

Sec. 2. Probably the most thorough attempts to 



chap, v DEVELOPMENT OF TAX SYSTEMS 149 

reform taxation in accord with clearly recognised 
principles of theoretical justice have been in Prussia. 
That country has taken advantage from time to 
time of the advice of men of science. It has been 
doubly happy (1) in having a goodlv „ 

j x. i j v y o o j P)-ussia made 

number of unpartisan financial scientists use of men of 
to draw upon; (2) in being able to draw science - 
upon them for advice, either by counting their 
pupils among its fiscal officers or placing the 
scientists themselves on its tax boards and commis- 
sions. It has been able to make changes with a 
broad conservatism that looked toward the gradual 
realisation of accepted ideals. With characteristic 
visionary eagerness, France has several times started 
out to obtain at a single bound some Little advance 
new ideal, but has each time fallen back in France. 
upon forms and methods but little better than those 
in vogue before. In England, special difficulties 
and objections have been met with little reference 
to any general plan. The result has „ 7 , 

J ° L England re- 

been a steady approach to a better state moves special 

of affairs, with only an occasional in- Jau s ' 

tensification of existing evils, due to the attempt to 

cure symptoms rather than to seek the underlying 

causes of the trouble. In the United States there 

have been spasmodic and ill-directed at- , r . . , 

r No consistent 

tempts at the removal of a few clearly reforms in the 
recognised abuses ; and without any con- 
sistent attempt to change the system, the result has 
been a decided modification. The general failure of 



150 INTRODUCTION TO PUBLIC FINANCE part ii 

the property tax to reach personal property gave 
rise at first to vigorous efforts to extend and sharpen 
the methods of assessment. These attempts fail- 
ing, other methods of reaching the mass of personal 
property were devised, which have resulted in a 
partial change of system wherever they have been 
successful. 

Sec. 3. The most instructive country to study is 
Prussia. The line between the old and the new 
may be drawn at the reforms of Stein and Harden- 
burg in the forms of land tenure. These reforms 
Establishment may be regarded as having been accom- 
0/ free trade i^^ in 181L Briefly stated, their re- 

in land in r J 

Prussia. suit was to abolish personal serfdom, 

dissolve the feudal partnership between tenants and 
proprietors, and establish free trade in land. 1 Al- 
though these reforms had to do mainly with land, 
and although the accompanying edict of 1810 prom- 
ised speedy reform of the land tax on the basis 
of a new survey, or cadastre, nothing material was 
accomplished in the reorganisation of this tax until 
1861. In that year the land tax was re- 

The land tax. 

arranged for the entire kingdom on the 
basis of a new and rapidly executed survey. Some 
twenty different provincial land taxes, with up- 
wards of one hundred minor variations, which had 

1 Seeley's Life and Times of Stein, Vol. I., pp. 187-297. Morier, 
"The Agrarian Legislation of Prussia during the Present Century," 
inProbyn [Editor], Systems of Land Tenure in Various Countries, 
pp. 306-316. See Selections in Rand. 



chap, v DEVELOPMENT OF TAX SYSTEMS 151 

existed before that time, were merged into an ap- 
portioned tax upon the net product of each piece 
of land as given in the cadastre. This tax recently 
yielded about 40,000,000 M. annually. 

The reforms which preceded this were those of 
the indirect consumption taxes, out of which finally 
emerged the personal class tax. The Consumption 
edict of 1810, which was referred to ^ xes \ am ~ 

formed into 

above as promising a reform of the land personal taxes. 
tax, seriously attempted to remove inequalities by 
destroying many feudal exemptions and privileges, 
and removing local differences. A general scheme 
of consumption taxes on necessaries, of which the 
excise on meal is a type, was planned for city and 
country alike. It was, however, immediately found 
that the meal tax was hard to collect in rural parts. 
As early as 1811, therefore, a poll tax of one-half 
thaler from every person over twelve years of age 
was substituted for the meal tax in all places except 
the larger towns. In 1820 this tax, still applying 
to the same places, developed into a classified poll 
tax : i.e. all persons were grouped according to 
rank, profession, and general prosperity, into a few 
classes, which were then taxed per capita at different 
rates for each class. Somewhat mocli- 

The class tax. 

fied the next year, so as to make twelve 
classes, in groups of three each, and with rates 
which ranged from one-half thaler to 144 thalers, 
and covering all persons over fourteen years old, 
this tax endured thirty years. As before, this tax 



152 INTRODUCTION TO PUBLIC FINANCE part n 

did not extend to the large cities, where the excise 
on meal and meat was regarded as placing the same 
burden on the people. Such a remarkably clear 
perception of the fact that indirect taxes are practi- 
cally the equivalent of direct taxes in the individual 
burden they impose is not often met with in fiscal 
history. 

In 1851, this tax was changed in order to make 
room for the introduction of an income tax on all 
The income persons having an income of over 1000 
tax - thalers. Those persons whose incomes 

were below this amount were taxed in the large 
cities by the meal and meat tax ; in the country and 
in small towns, by a class tax, like the old one, with 
rates ranging from one-half thaler to 24 thalers, 
according to the supposed income. Persons living 
in large cities who paid the income tax were allowed 
to deduct 20 thalers from their income as com- 
pensation for the meal and meat tax they were 
supposed to have paid. Later reforms removed 
these gate excises except for local purposes. As 
the income tax forms a special topic in a later 
chapter, we will not at present follow the details 
of its • development and reform. It is sufficient to 
say that it was a progressive tax on the income 
of every person. 1 

When the land tax was reformed in 1861, the 
building tax was separated from it, having been 
until that time a part of it; and all old taxes of 

1 See Chapter IX. 



chap, v DEVELOPMENT OF TAX SYSTEMS 153 

a similar sort were merged in the new one. This 
tax is assessed in the cities according to the rental 
of the buildings, and in the country ac- 

1 piii Building tax. 

cording to the size 01 the lands con- 
nected with the houses, and other characteristics. 
One of the reforms that was made after the peace 
of Tilsit to strengthen the weakened economic re- 
sources of the country was the establishment of 
general industrial freedom. Naturally, such a 
change would have been regarded as a failure from 
the standpoint of the statesmen of the times, if it 
could not be made to yield a revenue to 

• . Industry tax. 

the treasury; so the new industries were 
burdened with a new tax. This tax, which was 
very weak, and which, wisely, perhaps, failed to 
meet all the new forms of industry which came into 
existence, was subjected to a thoroughgoing reform 
in 1891. But it was at that time transferred to the 
local governments. Capital invested and some of 
the permanent features of each business form the 
basis of this tax. 

The Prussian system, as it existed before the 
great reforms of 1893, may now be seen as a whole. 
It consisted of two parts : (1) There was a group 
of three complementary taxes upon the summary of 
produce of property and capital, — the the Prussian 

system before 

land tax, the building tax, and the m- tne recen t r e- 
dustry tax ; (2) there was a system of f° rms - 
personal taxes culminating in an income tax. 
The former group, true to the economic tenets of 



154 INTRODUCTION TO PUBIIC FINANCE part n 

the first three-quarters of the century, taxed the 
productive agencies. The latter, although it orig- 
inated as a consumption tax, aimed at taxing the 
shares in distribution. Thus the older consumption 
taxes, which were originally assessed without any 
very clear idea of what the justification was, but 
were used because productive of large revenues, 
yielded to new taxes supposed to be more fairly 
in accord with the modern system of distribution. 

We are now in position *to see the significance of 
the great reforms of 1893 (all of which went into 
The great re- effect in 1895), made under the leader- 
formsof 1893. ghjp f Finanzminister Dr. Miquel. 
These reforms place Prussia far in advance of all 
other countries in the theoretical perfection of her 
tax system. 1 The income tax, which has long been 
correctly regarded as the foundation of the Prussian 
tax system, was subjected to a thorough reform in 
1891. 2 It was strongly urged at that time that 
income from property represented a far higher fac- 
ulty, per unit, than income from labour and personal 
exertion, and, therefore, that a perfect system should 
contain two kinds of progression : one that taxed 
larger incomes more heavily than smaller ones ; 
another that taxed incomes from property more 
heavily in proportion than incomes from labour. 
It was felt that the existing produce taxes (ffir- 

1 See Seligman, Essays, pp. 330-339. References to larger and 
more detailed statements are given there. 

2 See Chap. IX. 



CHAP. V 



DEVELOPMENT OF TAX SYSTEMS 



155 



tragsteuern), the land, building, and industry 
taxes, failed to accomplish this end. Hence one of 
the reforms of 1893 was the surrender The genera i 
of these taxes as royal taxes, and the property tax. 
initiation of a general property tax as supplement- 
ary to the income tax. This tax, which can only 
be properly understood when its supplementary 
character is held in mind, is arranged as follows : 

The tax is one-fifth per cent on the lower limit 
of the class within which the property falls. The 
classes go by stages of 2000 M. from 6000 M. to 
40,000 M., of 4000 M. up to 60,000 M., of 10,- 
000 M. up to 200,000 M., and above that of 
20,000 M. each. 

Thus: 

Property. 

Up to 6,000 M. 

From 6,000 " 8,000 " 

8,000 " 10,000 " 

10,000 « 12,000 " 

20,000 " 22,000 " 

40,000 " 44,000 " 

60,000 " 70,000 " 









rAx. 


exempt. 






3M. 






4 


u 






5 


a 






10 


a 






20 


a 






30 


" etc 



Above 200,000 M. the stages are 20,000 M. each, 
and the tax increases 10 M. in each stage. 

This tax being supplementary to the income tax 
accomplishes the result of imposing a differential 
rate on funded income as against unfunded in- 
come. 

The abandonment by the State of the three old 
taxes on land, buildings, and industry rendered the 



156 INTRODUCTION TO PUBIIC FINANCE part n 

reform of local taxation possible. As has already 
been said, the proper co-ordination of all tax burdens 
The reform of is one of the chief problems of modern 
local taxation. ^ ax reform. With the exception of the 
beer taxes, and the meat and meal taxes still used 
by some of the cities, local taxation in Prussia is 
mainly direct. Most of it, until 1895, took the 
form of additional percentages to the rates of the 
royal taxes. In some cities there were important 
special local taxes, like the house rent tax in Berlin. 
Prussia, also, grants subsidies from the royal treas- 
ury to the local bodies for special purposes. But 
the symmetry of the national system was somewhat 
destroyed by these additional rates. Such additions 
to the income tax were especially intolerable. Real 
estate is, moreover, a particularly good basis for 
local assessment. It cannot evade the tax, and it is 
the recipient of particular benefits from good local 
government. The same is true of businesses of a 
local character, although it is not safe to let the rate 
vary from place to place. Hence these three taxes 
were handed over to the local bodies. At the same 
time the attempt was made to regulate all other 
sources of local revenues. 

The Prussian system as it now stands comes 
nearest to the realisation of the taxation of faculty 
of any in the world. The chief difficulties that have 
arisen are those of assessment. The progressive rate 
gives rise to a special incentive to the concealment 
of larger incomes, and not even the general excel- 



chap, v DEVELOPMENT OF TAX SYSTEMS 157 

lence of Prussia's administration lias been preventive 
of under-assessment. 1 

Sec. 4. In France indirect taxation has probably 
found a higher development than anywhere else. 
Some of the main taxes are on the consumption 
of wine, spirits, beer, sugar, salt, tobacco, etc. ; there 
are also the octrois or gate duties collected by some 
of the cities as a means of contributing High develop- 
their share of some of the direct taxes me ^ t0 J ini - 

rect taxes in 

to the general treasury. There are also France. 
the taxes on acts and transfers, which will be treated 
under fees, since they assume a public service, and 
the customs duties. Not peculiar to France, but 
receiving a high development there, is the mode 
of collecting a tax on consumption by a monopoly 
of the manufacture of tobacco in the hands of the 
government. The imperative necessity under which 
France has laboured all through this century of 
continually increasing her revenues, and the danger 
of making the burden unbearable if thrown upon 
the existing direct taxes, as well as the desire on the 
part of the legislators of concealing so far as possible 
the actual burden, lest an impatient constituency 
rebel, accounts well for the relatively high develop- 
ment of indirect taxation. The preference for in- 
direct taxes as the main reliance of the public reve- 
nues argues, however, a low stage of political ethics. 

1 See the revelations of the Bochum investigations, quoted "by 
Wagner in Schanz Finanzarchiv, XVIII. year, Vol. II., pp. 107, 
108. 



158 INTRODUCTION TO PUBLIC FINANCE part n 

The more highly developed the consciousness of 
citizenship and membership in the State, the easier 
it is to make direct taxation effective. 

Direct taxation in France dates in its present 
form from the Revolution. All the taxes of the 
ancient monarchy were abolished at that time and 
a fixed scheme of taxes on revenue-yielding prop- 
erty substituted. This s}^stem of direct taxes has 
four chief members : (1) the tax on real 

The members v y 

of the system estate ; (2) the tax on persons and dwell- 

of direct taxes. ingg . (g) ^ tax Qn doorg ^ win _ 

dows ; (4) the tax on business. Supplementary to 
this system are a number of taxes classed officially 
as assimilated to the direct taxes. These, so far as 
they flow into the State treasury, are: (1) the tax 
on mines ; (2) the charges for the verification of 
weights and measures ; (3) the tax on goods in 
mortmain falling on the property of the communes, 
hospitals, churches, seminaries, charitable institu- 
tions, etc. ; (4) the charges for the cost of inspec- 
tion of pharmacists, grocers, druggists, and herbists. 
Of these numbers 2 and 4 are practically fees, num- 
bers 1 and 3 are merely definite kinds of real estate 
taxes. 1 

The real estate tax, the personal and dwelling 
tax, and the door and window tax are apportioned 
taxes. The real estate tax, which is a combined 

1 The official classification of taxes in France is very complex, 
as the example above given shows. In order not to confuse the 
student it will not be followed further in this work. 



chap, v DEVELOPMENT OF TAX SYSTEMS 159 

land and building tax, is apportioned upon the basis 
of a very elaborate survey and valuation completed 
in 1850, and carefully kept up. These The appor _ 
taxes are apportioned in successive steps tioned taxes. 
first to the departments, then to the arrondissements, 
and then to the communes, by the several legislative 
bodies, and finally divided among the individuals 
in each commune by a "conseil de repartition." The 
tax on persons and dwellings, also apportioned, is a 
poll tax, with an attempt at gradation according to 
the ability supposed to be indicated by the rent of the 
building occupied. It consists of two parts: (1) the 
amount of three days' wages of labour at from one- 
half to one and one-half francs per diem; (2) the tax 
on the rent of the building occupied as a private dwell- 
ing. The cities of Paris, Lyons, Marseilles, and a few 
others raise their shares of this tax by the means 
of duties on goods brought into the city, i.e. octroi. 
The door and window tax is an apportioned tax 
rated according to the number of windows and 
doors in the houses. It was intended to supplement 
the personal and dwelling tax, but it is really an 
addition to the real estate tax. It is paid by the 
owner and he is allowed to shift it if he can to 
the tenant. 

The industry tax, contribution des patentes, unlike 
the other members of the system, is not apportioned 
but proportioned. It is intended to reach the bulk 
of the personal property, and in a rough way covers 
income from certain kinds of labour. Originally it 



160 INTRODUCTION TO PUBLIC FINANCE part n 

was assessed in proportion to the value of the loca- 
tion of the factory, store, or workshop occupied by 
The droit de the industry. Now it is assessed upon 
patent. some elaborately constituted classes, in 

rates which vary with the size of the community 
in which the business is done, and the rental of the 
place of business. It includes all kinds of commer- 
cial and industrial enterprises and occupations, large 
and small, and also the liberal professions, when not 
exercised in behalf of some already taxed business 
enterprise. The agriculturalists are exempt. 

Direct taxation in France may be summarised as 
falling mainly on the agents of production and the 
sources of wealth. 

Sec. 5. The English system of taxation can be 
very briefly treated here, because the principal com- 
ponent parts will be discussed in detail in later 
chapters. What is necessary here is to give an 
outline of the system as a whole. The greatest 
change in the British scheme of taxation within 
Thereformsof this century was the elimination of the 
1840-1850. protective principle from the customs 
duties, — and indirectly from the excises also, — 
brought about in the period from 1840-1850, by 
the abolition of the corn laws and the agitation 
leading thereto. The consequent simplification of 
both the import duties and the excises rendered it 
possible to manage them simply as a source of 
revenue with a view to obtaining relatively larger 
sums. The customs duties, the entire tariff of 



chap, v DEVELOPMENT OF TAX SYSTEMS 161 

which now contains only 40 rates, and the some- 
what more numerous excises and stamp duties, pay 
one-half the total annual revenue. The property 
and income tax, which was restored in 1812 and 
has since been the variable or elastic ~, 

The property 

element in the system, will also receive and income 
special attention in another chapter. In- ax ' 
asmuch as this famous property and income tax 
is a system, in itself, of five taxes which are calcu- 
lated to fall upon the chief sources of wealth, it 
complies, in a way, with the requirements of uni- 
versality. Its rate is digressive, so that it attempts 
to comply with the requirements of justice. It may 
be looked upon as the complete system of direct 
taxation. Outside of the system there are two 
remnants of older taxes which are anomalies and 
destroy, somewhat, the logic of the system. This 
lack of any logical reason for retaining them does 
not necessarily form any good reason for abolishing 
them. They give rise to no serious complaint, they 
are old and have been in the main capitalised, so 
that they form no real burden at present. They 
are the land tax of the eighteenth century, which 
is now a redeemable rent charge, and the house 
duty. This latter developed out of the hearth tax 
of 1662. In 1688 it had been replaced by a window 
tax. In 1778 a tax on the annual rental 
was added to the window tax, and finally 
after 1851 this tax on the rental value was left to 
stand alone. 

M 



162 INTRODUCTION TO PUBLIC FINANCE part n 

There is still another tax which supplements the 
property and income tax, and that is the inheritance 
Theinheri- "tax. The most recent changes in these 
tance tax. inheritance taxes, — " death duties," — 
which have existed in England since 1694, will 
receive attention under another heading. The im- 
portant thing to note in this connection is that these 
taxes have introduced the principle of progression 
very extensively into the tax system of England. 

The English system as it now stands, consists (1) 
of the customs and excise duties, (2) of the so-called 
property and income tax, a digressive tax upon five 
kinds of income, (3) two older taxes, the land tax 
and the house tax, (4) a graduated inheritance tax. 

The different authorities that have had the power 
to levy local rates in England are very numerous. 
The whole system is very complex. The different 
rates, each going by the name of the authority that 
levies it, or the purpose for which it is collected, are 
mostly upon the same base, namely, the annual rental 
of the various tenements. They are generally levied 
upon occupiers. In the case of tenements of less 
than £10 annual value, the difficulty of collecting 
from the occupier is so great that the plan of making 
the landlord advance the tax has been adopted. He 
then shifts it to the occupier. The recent reforms 
of county and municipal government in England 
have resulted in a simplification of local rates. 

Sec. 6. Like the English, the American system 
can be but briefly treated here, since many of the 



chap, v DEVELOPMENT OF TAX SYSTEMS 163 

taxes will receive our attention in subsequent chap- 
ters. The principal federal taxes have been customs 
duties and excises. The States, or commonwealths, 
have confined themselves rather closely to direct 
taxes, as have also the municipalities. Down to 
1840, commonwealth taxation was very meagre. 
Many of. the States attempted to get along without 
recourse to taxation at all, depending for revenues 
upon the sale of lands, fees, and other sources. 

The evolution of taxation in this country during 
this century has resulted in little advance. Indeed, 
it has been to make confusion thrice con- „,, , 

The absence of 

founded. Not only has difficulty been sound princi- 
found in adjusting the spheres of the p es ' 
different taxing authorities, but no sound principle, 
indeed scarcely any principle at all, has been fol- 
lowed. Before the Revolutionary War the general 
property tax, whose origin we have already seen, 
answered the requirements of justice and equality 
fairly well. As has been frequently remarked, the 
American people were a saving race. As fast as 
they created wealth they turned it into property. 
The forms of property were, even when not im- 
movable, tangible and unconcealable. Real estate 
formed the mass of it. Movable property consisted 
of furniture, farm utensils, and cattle. There were 
few stocks or bonds, or other forms of credit in 
which to invest wealth. Among such a people a 
tax levied on property that was easily ascertainable 
answered all the requirements. 



164: INTRODUCTION TO PUBIIC FINANCE part n 

But as intangible personal property increased, as 
opportunities for investment multiplied, it became 
m , . impossible to make the property tax 

The property r . r r J 

tax not "gen- "general." It became a tax on real 
estate except for the few conscientious 
persons who declared their personal property. The 
commonwealth legislatures made half-hearted at- 
tempts to sharpen the procedure of assessment. 
But little or nothing was gained in that direction. 
Prompted by a wave of popular excitement, or a 
feeling of bitterness toward certain classes of cap- 
italists, the legislatures have, from time to time, 
The corpora- attempted to reach personality by taxing 
ion axes ^ 1Q corporations in which the untaxed 

introduce a x 

new principle, funds were invested. The resulting cor- 
poration taxes worked some slight improvement. 
Under the existing conditions they cannot all be 
shifted. They supplement the general property 
tax very effectively. Sometimes, the legislatures 
Taxation of have attempted to tax mortgages, as if 
mortgages. they were a part of the property on 
which they rest. As mortgages have to be recorded 
in order to be legal, it is possible to get at the full 
value. In some commonwealths, then, the mort- 
gagee is taxed on his interest in the property and 
the owner is exempt to that extent. In California, 
where this plan has been most extensively tried, the 
result has not been at all what was desired. The 
only effect has been to raise the rate of interest on 
mortgages by the amount of the tax plus from one- 



chap, v DEVELOPMENT OF TAX SYSTEMS 165 

fourth to one per cent. That is, the mortgagees 
have succeeded in shifting the burden of the 
tax to the real owners with a handsome addition for 
their trouble. Such a shifting is always possible 
when any one form of capital is taxed leaving other 
forms untaxed, either because they are exempt or 
because they escape the tax. So the American sys- 
tem remains what it has been since 1840, — a re- 
gressive tax on real estate, supplemented in part 
by corporation taxes in some commonwealths, and 
by a few inheritance taxes. It is a system con- 
demned by every scientific writer and impartial 
statesman, but retained as the only source of rev- 
enue. 

The difficulties which have prevented persistent 
attempts at reform remain, and it is hard to see how 
they can be overcome. No one com- „,. ,.„ ... 

J The difficulties 

monwealth can afford to pursue personal in the way of 
property with so much vigour as to act- 
ually impose a tax on all of it. Only concerted 
action could accomplish this. Capital is sufficiently 
mobile to move easily from commonwealth to com- 
monwealth, and if compelled to bear its fair share of 
the burden in one and not in another, it will surely 
migrate. Legislators are extremely desirable of 
attracting capital and very wary of repelling it. 
The owners of capital cannot be taxed personally. 
They change their residence from city to suburb 
and even to unfrequented rural parts on the slight- 
est increase of local taxation and move from com- 



166 INTRODUCTION TO PUBLIC FINANCE part ii 

mon wealth to commonwealth with equal facility. 
Residence too is a matter of intention, and it is easy 
if personal taxes are proposed to plead residence in 
another commonwealth. Concerted action being 
practically impossible, the tax-dodger is safe. 

But while the present system is very bad, it has 
been tolerated in the past, and arouses less discon- 
R f th tent at present than might be expected, 
toleration of because it falls mainly on the receivers 
e sys em. ^ economic rent. The value of land in 
many parts of the United States has increased very 
rapidly and is still increasing steadily. So that in 
those parts, while the taxed owner feels the burden 
severely, he consoles himself with the thought that 
he is largely or wholly reimbursed by the increased 
price which he hopes to get for his land. The gen- 
eral practice, too, of assessing real estate at a fraction 
of its value, even though so universal as to work no 
actual lessening of the burden in any individual 
case, tends to stifle murmurs of discontent. For 
the owner secretly congratulates himself on not 
having to pay on all of it, — - an illogical basis for 
self congratulation, to be sure, but still not infre- 
quently effective. The same person, too, is not 
infrequently the owner of taxable personal property 
which he conceals, and he is less uneasy about the 
tax on real estate so long as he is able to save the 
other. 

Another reason for the absence of a concerted 
movement of real estate owners to lessen the burden 



chap, v DEVELOPMENT OF TAX SYSTEMS 167 

arises from the fact that the real estate tax is a 
real burden on the property, and shifts itself by 
the process of capitalisation. For the The tax on 

-i . i • _ i , real estate be- 

new purchaser gets his property at a 
lower price than he would have to pay if charge. 
the tax had not been imposed. The frequency and 
ease with which real estate changes hands gives con- 
stant occasion for this capitalisation of the tax. 
Every real tax, when not a part of a well-organised 
system which taxes every kind of property or all 
receivers of wealth, can be shifted in this way. It 
becomes a rent charge on the property to which it is 
thus attached. A dim perception of this, and a pos- 
sible realisation of the fact that a reform of the tax 
system might transform this tax into an actual 
burden again, may lie at the bottom of the indiffer- 
ence with which the average land owner views pro- 
posed reforms. 

All of this selfish indifference is, of course, mis- 
taken. It defeats its own ends. The burden of 
taxation is only light when properly adjusted to all 
the shoulders. The serious effects of an unjust, 
unequal, and ill-arranged system of taxes upon the 
economic forces of the country has been treated else- 
where. The property tax forms the subject of a 
special chapter. 

We have spoken merely by courtesy of an Ameri- 
can system. As a matter of fact there is none that 
is worthy of the name. Federal authorities tax 
with no reference to commonwealths and munici- 



168 INTRODUCTION TO PUBLIC FINANCE part n 

palities ; commonwealths and municipalities, with- 
out reference to federal action. Municipal taxes 
' . . are, however, generally adjusted to the 

senceofsys- existing commonwealth taxes, but only 
in such a way as not to make the result- 
ing burden appear too large. Their efforts in this 
direction have only served to intensify the existing 
inequalities. 



chap, vi EXCISES 169 



CHAPTER VI 

EXCISES 

Section 1. Generally speaking, indirect taxes are 
older than direct taxes. They are suitable to a 
more primitive organisation of society. Hence it 
will not be amiss to treat them before we analyse 
the direct taxes. By far the larger part of the 
indirect taxes are on consumption (Auf- „ 

r v J Comparison 

wandsteuerri). Most of the taxes on of excises and 
consumption fall under one or the other cus oms ' 
of two heads : they are excises or customs duties. 
In the United States the excises are called inter- 
nal revenue taxes. Excises may be defined as all 
those taxes levied within a country on commodities 
destined for consumption. Customs duties fall on 
commodities as they enter the country. In their 
effect on the economic condition of the country 
and on the tax-bearer they are practically the same. 
In both cases the persons who first advance the 
taxes are generally supposed to reimburse them- 
selves from the persons to whom the wares are 
sold. In both cases it may be true that only a 
part of the funds taken from the tax -bearer flows 
into the treasury. For both of them enable pro- 
ducers who escape, or whom it is not intended to 



170 INTRODUCTION TO PUBIIC FINANCE part n 

tax (as the home producer in the case of a tax 
on imported commodities), to collect on each piece 
of goods sold a tax in the form of a price higher 
than he could otherwise obtain, the amount of which 
goes into his own pocket. Sometimes this subsi- 
dising of certain producers is intentional, sometimes 
only accidental. In any case the ultimate effects 
which will result from such an interference with 
the ordinary currents of trade cannot be fully 
traced. It is very seldom that excises have been 
intentionally used to change the movement of 
economic life. But customs duties have regularly 
Excises have been used for that purpose. Excises 
sometimes have, to be sure, been used to influence 

been used for ., 

moral re- social lite, to lessen the consumption 01 
forms. certain commodities the use of which is 

regarded as injurious to the individual or dangerous 
to society. But the object, in that case, is social, 
not economic. 

There used to be a large number of the so-called 
direct consumption taxes. A few of these still 
~. , survive. They are direct in the first 

Direct con- J 

sumption sense of that term, but not in the second. 
These direct taxes on consumption are 
either remnants of the older taxes on movables, 
or arose from the attempt to frown on the use of 
luxuries. They differ from excises in that they 
are levied on the consumer and not on the person 
or persons who supply him with the commodities. 
They are to-day few in number and of little fiscal 



chap. VI EXCISES 171 

importance. The chief instances in modern times 
and the most universal are the dog taxes. There 
are in England similar taxes on guns, carriages, 
armorial bearings, and men servants. In the United 
States watches have been made contributory in this 
way. Plate, houses, clocks, hair powder, and a 
great many other articles have been taxed. It is 
regarded as just to make articles of luxury the 
subjects of taxation because their use is supposed 
to be evidence of ability to pay. The tendency 
now is to leave the administration of direct con- 
sumption taxes to the local bodies. They are some- 
times combined with police regulative laws and are 
assessed as a means of enforcing those ordinances. 
This is the case with the dog tax in America. 

Sec. 2. It is the excise tax in all its forms that 
has displaced the direct consumption taxes. The 
distinguishing feature of this tax is that some 
resident seller of an article, whether produced in 
the country or abroad, or the manufacturer of 
such an article, advances the tax either some excises 
during the process of its production or have the same 

purpose as 

at some time before it reaches the con- sumptuary 
sumer. The main purpose of the excise laws - 
is to obtain revenue, but the ideas underlying the 
sumptuary laws, and the desire to use taxation as 
a means of social and moral reform have dictated 
some of these taxes or at least the selection of the 
commodities to be taxed. The fact that the con- 
sumption of certain articles like spirituous liquors, 



172 INTRODUCTION TO PUBIIC FINANCE part ii 

tobacco, and playing cards is condemned in itself, 
and that such articles are regarded as unneces- 
sary luxuries has led governments to disregard, or, 
indeed, to favour, the repressive tendency of the 
tax upon the use of them. It is felt that in case 
the tax should lessen the consumption, the gain to 
the community in moral and social well-being would 
more than offset the loss to the treasury in revenue. 
Moreover the consumption of such articles is not, 
it has been found, liable to serious diminution on 
account of the tax, unless, as in the case of the 
French tax on tobacco, it is very high. 

In the seventeenth century there was a marked 
tendency to multiply excise taxes. So strong did this 
tendency become that not a few able writers advo- 
An exclusive cated a general excise as the most just 
system of ex- f orm f tax. 1 Many of the recent sug- 

cise taxes . . 

would be un- gestions for the reform of taxation in 
J ust - France are in the same direction. This 

tendency can be easily explained by rapid multi- 
plication of taxable commodities. It was urged 
that -the ease with which such taxes were shifted 
ensured in the end perfect justice. It was also 
often urged that consumption is more or less volun- 
tary, and any one who finds the tax too heavy can 
avoid it or lessen it by curtailing his consumption 
of the taxed article. Thus if the taxed articles 
are not important necessities the contributor has 
a certain control over his share and can suit it to 
1 Cf. Cohn, p. 336 ; Seligman, Shifting and Incidence, pp. 12 ff. 



chap, vi EXCISES 173 

his means. If the tax is on a luxury, he has abso- 
lute control over his contribution. But modern 
investigations into the character of distribution and 
consumption would seem to indicate that these 
views are erroneous. There is no doubt that con- 
sumption is a very poor criterion of tax-paying 
ability. What a man spends is no indication of 
his tax faculty. There are also some important 
administrative difficulties. The yield of these taxes 
is beyond the control of the fiscal officers. An exclusive 
If more revenues are needed, it is not system °f ex ~ 

cises inexpedi- 

always possible to obtain them by rais- ent. 
ing the rates, since a rise in the rate may, in 
fact, lessen the revenues by lessening the demand 
for the articles. They are not variable at the 
pleasure of the treasury. It follows therefore, that 
a system of excises would be extremely inelastic. 
But as parts of a system, the elasticity of which 
is provided for by other elements, they have proved 
very valuable on account of the relative ease of 
administration, and the large returns TT , . 

° Used in con- 

which they can be made to yield. In nectionwith 
England, Russia, and France the returns other taxes ' 
of the excises and customs duties are about one-half 
of the national revenues. In Germany the consti- 
tution confers upon the Imperial legislature the 
power to regulate the customs and excises upon 
domestic productions of salt, tobacco, spirituous 
liquors, beer, sugar, and syrup. 1 The common- 
1 Burgess, Political Science, II., p. 174. 



174 INTRODUCTION TO PUBLIC FINANCE part II 

wealths of the Empire do not levy excises on the 
articles above mentioned except Bavaria, Wurtem- 
berg, and Baden. The Empire cannot tax any other 
articles. In the United States the federal govern- 
ment derives nearly half its revenues from excises 
and an almost equal amount from customs. 

The following principles have been developed 
as governing the returns obtainable from excises: 
Excises on (X) Articles which are regarded as neces- 
necessaries. saries and which naturally have or can 
have a wide consumption, are very suitable under 
this tax for obtaining large revenues. In this case 
the operation of the tax is like that of a poll tax. 
The French gabelle is an example. The effect of 
these taxes, if high, is possibly to curtail consump- 
tion and possibly to cause a substitution of other 
similar articles not taxed. Possibly, too, they may 
curtail the consumption of other articles by lessen- 
ing the money available for their purchase. But 
even with a low rate, these taxes are extremely 
productive, on account of the large number of con- 
tributors. The objection to burdening necessaries 
and rendering the existence of the poor harder, 
leads, however, sooner or later, to their abolition. 
These, like the poll taxes, recognise no differences in 
_, . ability. They are, however, good sources 

Excises on J J ° 

luxuries and of revenue in cases of extreme need. 
comjor s. ^^ Luxuries and comforts may be taxed 

heavily. The general principle is to select those 
luxuries of the widest consumption as the objects 



CHAP. VI 



EXCISES 175 



of the heaviest taxes. Thus alcoholic liquors and 
tobacco are universally taxed in this way. In the 
United States they form almost the sole objects. In 
times of special need it is customary to press the 
semi-luxuries or comforts into service. Here again, 
the choice is made of articles of widest consump- 
tion ; such as coffee, sugar, silks, chocolate, etc. In 
most modern excise systems, the heaviest burden 
falls upon luxuries. In England, where the receipts 
from excises are 30 per cent of the total revenues, 
the chief burden falls upon spirits (X 15,189,000) and 
beer (^£9,536,000). In France, aside from the octroi, 
the chief excises are on beer, wine, spirits, and to- 
bacco, then on sugar, salt, and playing cards. In 
Germany, apart from the city gate taxes, they fall 
upon alcoholic drinks, tobacco, and sugar. There 
are special difficulties which Germany encounters in 
the administration of these taxes, due to deep-seated 
historical prejudices on the part of the commonwealths 
of the Empire. Moreover, the yield is not as large 
as it might be because of the bounties on sugar ex- 
ported. Modern excises are, then, mainly taxes on al- 
coholic drinks and tobacco with the addition of a few 
other duties upon playing cards, etc., and in cases of 
great need, upon a few articles of large consumption. 
Sec. 3. By far the most interesting features of 
the excises are the methods of assess- Methods of 
ment. These are practically of three assessment, 
kinds, which may be variously combined : (1) A tax 
on the producer or seller such that the failure to 



176 INTRODUCTION TO PUBLIC FINANCE part II 

pay it deprives the person of the right to sell, and 
renders him liable to penalty. That is, a license is 
sold. (2) An impost on each unit of the article. 
This demands the registration of the dealers therein ; 
and sometimes they are required to give bonds as 
surety for the payment of the tax. Wherever it is 
possible, this impost is collected by means of the 
sale of stamps purchased of the government to be 
affixed to each package, hogshead, etc., or by means 
of brands, or other marks affixed by officials who 
thus receipt for the payment. (3) By the reten- 
tion of the monopoly of manufacture and sale by 
the government. 

England and America use a combination of (1) 
and (2). Thus in England every barrel of beer is 
taxed 6s. 9d. and every dealer and brewer pays a 
license besides. 1 

£ s. d. 

1 Beer, per barrel of specific gravity of 1055 degrees 6 9 

Beer dealers' and brewers' annual licenses : 

Beer dealers, wholesale, not brewers, United Kingdom .36 1 
Beer dealers to sell any quantity, additional (not to be 

consumed on the premises, England and Ireland) 1 5 

Brewers brewing beer for sale, U. K 1 

Other brewers, U. K., annual value of house from £8 

to £10 4 

Annual value from £10 to £15 9 

Retailers of beer, cider, and perry : 

For consumption on the premises, U. K 3 10 

Not to be consumed on the premises, England 1 5 

Retailers of table beer, U. K 5 

Retailers of beer and wine, U. K. : 

For consumption on the premises 4 

Not to be consumed on the premises 3 



chap, vi EXCISES 177 

In the United States, all internal revenue taxes 
are payable by stamps. These stamps are pasted 
upon the packages containing the taxed commodities 
in such a way as to be necessarily broken when the 
package is opened. Or else they are pasted up or 
exposed in the places of business. The table below 
shows the whole system. 

Schedule of articles and occupations subject to tax under the 
internal revenue laws of the United States in force August 28, 1894 
(with the exception of the income tax then in force but since found 
unconstitutional). From the compilation of 1894: 

Special Taxes. 

Eate of tax 

Eectifiers of less than 500 bbls. a year $100.00 

Rectifiers of 500 bbls. a year, or more 200.00 

Retail liquor dealers 25.00 

Wholesale liquor dealers 100.00 

Retail dealers in malt liquors 20.00 

Wholesale dealers in malt liquors 50.00 

Manufacturers of stills 50.00 

And for stills or worms, manufactured, each 20.00 

Brewers, annual manufacture less than 500 bbls 50.00 

Brewers, annual manufacture 500 bbls., or more 100.00 

Spirits are taxed in a similar way and so are the dealers therein. 
In the case of tobacco the import duty forms the tax on the com- 
modity, and the manufacturer pays a license graded according to 
the size of his business. 

Tobacco manufacturers : 

£ s. d. 

Under 20,000 lbs 5 5 

20,000 to 40,000 " 10 10 

40,000" 60,000 " 15 15 

60,000" 80,000 « 21 

80,000 " 100,000 » ... 26 5 

100,000 31 10 

N 



178 INTRODUCTION TO PUBLIC FINANCE part n 

Eate of tax 

Manufacturers of oleomargarine $600.00 

Retail dealers in oleomargarine 48.00 

Wholesale dealers in oleomargarine 480.00 

Distilled Spirits, etc. 

Distilled spirits per gallon $ 1.10 

Wines, liquors, or compounds known or denominated as 
wines, and made in imitation of sparkling wine or cham- 
pagne, but not made from grapes grown in the United 
States, and liquors, not made from grapes, currants, rhu- 
barb, or berries grown in the United States, but produced 
by being rectified or mixed with distilled spirits, or by the 
infusion of any matter in spirits to be sold as wine, or as 
a substitute for wine, in bottles containing not more than 
one pint, per bottle or package 10 

Same, in bottles containing more than one pint, and not more 

than one quart, per bottle or package 20 

And at the same rate for any larger quantity of such mer- 
chandise, however put up, or whatever may be the package. 

Stamps for distilled spirits intended for export, for expense.. .10 

Tobacco and Snuff. 

Tobacco, chewing and smoking, fine cut, cavendish, plug or 

twist, cut or granulated, of every description, per pound.. $ .06 
Snuff of all descriptions, per pound 06 

Cigars and Cigarettes. 

Cigars and cheroots of all descriptions, domestic or imported, 

per thousand % 3.00 

Cigarettes, domestic or imported, weighing not over 3 lbs. 

per thousand, per thousand - . . .50 

Cigarettes, domestic or imported, weighing over 3 lbs. per 

thousand, per thousand . . 3.00 

Fermented Liquors. 

Fermented liquors, per bbl., containing not more than 31 

gal .$ 1.00 

Per hogshead, 63 gal 2.00 



chap, vi EXCISES 179 

Oleomargarine. Eate of ^ 

Domestic, per pound $ .02 

Imported, per pound 15 

Opium. 
Prepared smoking opium, per pound . . c $10.00 

Plating Cards. 
Playing cards, per pack, containing not more than 52 cards.. $ .02 

» 

Sec. 4. We may now look at a few characteristic 
excises. The taxation of salt by means of an ex- 
cise, collected in the form of a tax on 

The salt tax. 

producers, a tax on sellers, the sale oi a 
monopoly to a private company, or state manufact- 
ure, is one of the oldest. On account of the nature 
of the commodity, a necessity for which there is no 
substitute, and of which poor and rich consume about 
the same amount, this tax acts practically as a poll tax. 
With the modern tendency to abolish or at least to 
lower poll taxes, as unequal and unjust, the salt tax 
has been largely abolished, or its rates have been so 
lowered as to practically nullify the returns. France 
to-day gets only 1,250,000 francs from the salt ex- 
cises, to which should be added the customs duty, 
making a total of over 3,000,000 francs. The Eng- 
lish salt tax yielded at the time of its abolition only 
£380,000. The United States war excise upon salt 
yielded only $300,000. 

The best, but not by any means the sole, example 
of the tobacco monopoly is in France. This inter- 
esting tax scheme began in 1674 under Colbert. It 



180 INTRODUCTION TO PUBLIC FINANCE part n 

continued with slight interruptions for over a cen- 
tury as one of the most productive parts of the rev- 
French tobac- enue system. It was leased to a ferme 
co monopoly, generate, who paid the government at the 
time of Necker 32,000,000 francs annually. At 
the time of the Revolution the monopoly was abol- 
ished, and an attempt was made to introduce a series 
of taxes on tobacco. But the monopoly was restored 
in 1810 by Napoleon I., and has continued ever since. 
Under the present law the culture of the plant is 
forbidden outside of certain localities. Each year 
the estimated amount required by the depart- 
ment is apportioned among the different applicants 
within the district where it is permitted to raise 
tobacco. Several thorough official inspections of the 
fields and crops are made, and even the number of 
plants and leaves is counted to ensure obedience 
with the regulation which demands the delivery of 
the whole crop to the government. Tobacco raised 
for export is similarly watched to see that none of it 
escapes into the channels of the French trade. The 
price for each quality is determined by a commission 
of officials and experts. A part, about one-half, of 
the supply is imported. The manufacture is carried 
on in public factories, which employ about 20,000 
workmen. The sale is in the hands of some 40,000 
petty officials, who receive a percentage of their 
sales and whose appointment is a part of the party 
spoils system. The revenues obtained in this way 
are enormous : 



CHAP. VI 



EXCISES 



181 



1815 
1869 

1872 
1876 
1880 
1885 
1890 



40,000,000 francs. 
197,000,000 
218,700,000 
262,300,000 
284,000,000 
300,000,000 
315,000,000 



The prices charged for tobacco are high compared 
with the prices prevalent in other countries, so high 
that the consumption is apparently checked thereby, 
it being per capita less than one-half that of Ger- 
many. Austria and Italy have very similar State 
tobacco monopolies. 

Sec. 5. On account of the large returns obtain- 
able from an excise on luxuries, and in view of the 
fact that any repressive effect of such m , 

J r The proper 

excises is not felt to be harmful, but is field for ex- 
often desired, it is probable that these czses ' 
taxes will be long retained. They are applicable to 
any luxury the consumption of which is large and 
of which the production is sufficiently simple or con- 
centrated to allow of supervision. But in general, 
excises as taxes on expenditure or consumption are 
unfair. What a man spends is no indication of his 
ability to pay taxes, and what a man spends on a cer- 
tain limited list of commodities is less so. When 
these taxes are made a subordinate part of a system 
and due allowance is made in the other taxes for the 
existing burdens, there is less objection to them. 



182 INTRODUCTION TO PUBLIC FINANCE part ii 



CHAPTER VII 

CUSTOMS DUTIES 

Section 1. Customs duties are taxes levied upon 
commodities when they cross the national boundary 
Customs line, or are admitted within a customs 

duties defined, territory, consisting of a combination 
of countries or of definitely limited parts of coun- 
tries. Unless a city or town forms an independent 
sovereignty, taxes levied on goods entering a city 
are not called customs duties, but octroi or imposts, 
and partake of the nature of excises. Duties upon 
goods passing from province to province in the same 
country are likewise not customs duties. Neither 
are tolls or transit duties charged upon goods pass- 
ing through the country. Such charges are fees 
for the ostensible or real service of the government 
in keeping up roads and bridges, maintaining peace, 
and allowing transit. 1 Customs duties are indirect 
consumption taxes of practically the same character 
as excises. Their treatment in a separate chapter is 
not on account of any actual difference in nature but 
because of their historical and fiscal importance. 

1 Cf . Bastable, p. 513, for contrary view. Bastable does not 
recognise fees as a separate class. Hence his identification of 
transit duties with customs duties. 



chap, vii CUSTOMS DUTIES 183 

Sec. 2. The oldest forms of customs duties were 
on exports and imports alike. They arose by anal- 
ogy from the transit tolls which were Old customs 

, ,i -in r\ duties covered 

customary m the middle ages. Once bothimports 
in use their fiscal importance was recog- and exports. 
nised, and it was easy from the standpoint of feudal 
politics to justify their continuance. Feudalism re- 
garded every act of the vassal as the concern of the 
lord. If any vassal, or later any subject, found a 
new means of gain, feudalism imposed on him the 
duty of contributing a part thereof to the lord or 
the king. If a subject sold a commodity to a 
foreigner it seemed to the men of the middle ages 
that the king's interests were affected, and it seemed 
right that his permission should be paid for. The 
export duty is often a sort of compromise accepted 
for the removal of the prohibition of exportation. 
With the decay of the older, cruder, mercantile ideas 
and the advent of a period when national wealth 
came clearly to depend upon the size of national 
trade more than on its direction, export duties fell 
away. It is interesting to note in this connection 
that England retained until the middle of this cen- 
tury an export duty on coal, supposedly for the pro- 
tection of her deposits from depletion. The fall of ex- 
Turkey is now the only country where P ort du ^ ies - 
export duties form an important item of revenue. 
There the duty is 1 per cent of all exported com- 
modities. Switzerland, Austria, Russia, and Italy 
have a few export duties upon products peculiar to 



184 INTRODUCTION TO PUBLIC FINANCE part ii 

their soil, the burden of which is supposed to fall 
upon the foreigner. France did away with them in 
1881 ; Germany in 1873. 

Import duties are still very numerous. As a 
branch of the taxes on consumption, their yield is 
very large. The German customs duties yield about 
27 per cent of the total imperial receipts. Until 
recently, about half of the United States federal in- 
come was from this source ; noAV it is slightly less. 
The English customs duties yield 25 per cent of the 
gross receipts, the French 15 per cent, and the 
Italian the same. 

Sec. 3. Although the fiscal interests are great, 
yet in every important country except England the 
receipts from this source are not regarded as of any 
greater importance than the effects upon the indus- 
tries of the country. There are then two sides from 
which these taxes must be studied : (1) From the 
side of revenue-yielding capacity; (2) from the 
side of the " protection " afforded the industries of 
the country which levies them. While it would be 
The purposes undesirable to introduce a full discus- 
of the customs s { on f ^he f ar-reaching economic effects 

duties bothfls- . . 

cal and poiiti- °i protective duties upon industries 
cal - and commerce in a treatise on finance, 

yet a brief statement of these effects and of the 
main reasons which have led great nations to adopt 
these taxes is essential to an understanding of their 
nature. It is as essential to know how and why pro- 
tective duties are intended to alter the existing 



chap, vii CUSTOMS DUTIES 185 

economic conditions, as it is to know how and why 
the income tax, for example, is supposed to leave 
them unaltered. 1 

Sec. 4. What is the distinction between a protec- 
tive tariff and a tariff for revenue ? It may be 
briefly stated as follows : A protective protective tar- 
tariff is a scale of duties so arranged as iff defined. 
to prevent importation, wholly or in part, and to 
raise the price of commodities from abroad, the pro- 
duction of which within the country it is intended 
to encourage. The scale of duties is therefore 
arranged with a view to the supposed needs of the 
industries which it is intended to develop. A 
tariff for revenue, on the other hand, aims to avoid 
any effect upon industries within the country, and 
the duties are laid according to prin- Revenue tar- 
ciples similar to those of the excise, if defined. 
upon articles of large consumption and great tax- 
bearing capacity. The term " a tariff for revenue 
only" so current in the United States, is the expres- 
sion of an unattainable hope. A moment's considera- 
tion of the law of international exchange, 2 namely, 
that the interchange of commodities between dis- 

1 To refuse, as Bastable does, to discuss protective duties be- 
cause we believe them "vicious" and "uneconomic" is not sci- 
entific. In spite of the condemnation heaped upon them by 
economists of the old school, the people of many great nations 
have continued to use them. This fact alone necessarily forces 
them upon our attention. We must trace the effect and incidence 
of these taxes as of any others. 

2 See Mill, Prin., Bk. III., Chap. XVII. 



186 INTRODUCTION TO PUBLIC FINANCE part n 

tant places is determined by differences in their 
possible cost of production in the same place, and 
The effect of not by their absolute cost of production 

all customs ,\ , j • , ■> • n 

, . m the separated interchanging places, 

trade. will reveal the fact that even a very 

small duty upon a single commodity affects the 
demand of the country from which that commodity 
comes for other things, and indirectly affects every 
commodity manufactured in the country laying the 
tax. The same is true of an excise. In fact, any 
consumption tax has far-reaching effects. Strictly 
speaking, there can be no such thing as a tariff for 
revenue only. What is meant by that phrase is that 
the tariff shall be so arranged as to yield the needed 
revenue with the least possible effect on the trade 
and industry of the country. 

It must be noticed that every tariff, even though 
it contains many protective features, also necessarily 
_. contains many duties which are mainly 

The two pur- J J 

poses always for revenue. Thus in the United States 
conjome . even with high protective duties, the 
main revenues were obtained from the taxes upon a 
few commodities. The receipts in 1888, for ex- 
ample, were : from duties on sugar and the like, 
152,000,000 ; from wool and woollens, $37,000,000 ; 
from iron and steel, $21,000,000 ; these three to- 
gether being more than half the entire receipts 
from customs duties. 

Sec. 5. The protective principle is widely applied 
in every important existing tariff of customs outside 



chap, vii CUSTOMS DUTIES 187 

of England, Holland, Norway, Belgium, Switzerland, 
and Denmark. This policy is clearly the outcome 
of national selfishness. The attempt to direct in- 
dustry into certain lines by artificial means cannot 
find support in any system of political „ . .. 

*•*■ j j i. Protection as 

economy that regards the largest possible a national pol- 
world's product as the, proper aim. 1 lcy ' 
The object is rather the greatest possible diversity 
of home products. In so far as this purpose is 
attained, it is by the process of shutting out com- 
petition and allowing the home producer to collect 
from home consumers a certain amount of support, 
greater or less, according to the supposed needs of 
the producer in question. In so far, then, the actual 
protection afforded is an item of public expenditure. 
Revenues collected by means of higher prices author- 
ised by law are spent in developing the industry 
protected. It is in every respect the same as if a 
subsidy were paid to the manufacturer or other pro- 
ducer, except that the money goes directly to him 
without first passing through the treasury. 2 

Sec. 6. We turn now to a treatment of the tax 
character of protective duties: (1) In the first place, 

1 See the article by Professor Folwell on "Protective Tariffs as 
a Question of National Economy," in The National Bevenues, a 
collection of papers by American economists, edited by Albert 
Shaw, Chicago, 1888. Contrary to the popular opinion as to the 
views of economists, none of the writers who have contributed to 
this symposium finds it possible to attack protection on a priori 
grounds. 

2 See above on expenditure for protection of industry. 



188 INTRODUCTION TO PUBLIC FINANCE part II 

it is clear that the more " protection " the duty 
gives, the less will be the revenues afforded to the 
A high pro- government, and the greater the possi- 

tective tariff -, -, , , n i • i • i i 

yields little revenues to the subsidised producer. 

revenue. Absolute protection means the exclusion 

of the foreign commodity and no revenue to the 
government. The subsidy that the producer can 
obtain is determined by the conditions of produc- 
tion ; it varies from nothing to the whole amount of 
the tax according as the cost of production varies 
above what the cost of the imported commodity 
would be without the duty. (2) Above a certain 
point high duties tend to diminish the revenues to 
the government, and increase the subsidy to the 
producer, by diminishing the amount of the com- 
modity imported. The point beyond which the 
At what point total revenues diminish is ascertainable 
18 . * e re ^ enue by a principle similar to that of charg- 

yielded larg- J r *- ° 

est? ing what the traffic will bear. In prac- 

tice that point can be ascertained by gradually 
increasing the duty until it is found that the im- 
portation begins to diminish, and stopping the in- 
crease of the duty when it is found that the added 
duty checks more of the importation than the in- 
creased duty compensates for. A tariff of customs 
The cost of duties arranged throughout on this prin- 
protectionu c [^\q W ould be a revenue tariff, and if 

paid by the r ' 

consumer. universal would yield enormous sums. 

It would, also, contain many protective features. 

The burden of such a tax would be insufferable. 



chap, vii CUSTOMS DUTIES 189 

No such general tariff has ever been enforced. 
(3) Protection is given only when the price is raised. 
The subsidy paid to the producer is paid by the 
consumers within the country. This part of the 
tax is never shifted to foreigners and ~, . 

& The tax actu- 

generally remains on the consumer. (4) ally collected 
But that part of the tax which flows into y e ^ overn ~ 

r ment is not 

the treasury of the government is not ahoayspaidby 

-i i , i -I -i -i • j -I , -i the consumer. 

always, although generally, paid by the 
consumer, whether protection is afforded thereby or 
not. There are a few rare instances in which the 
tax that forms a part of the government's revenue 
is shifted either to the foreigner, i.e. the producer or 
the speculator, i.e. the importer. These instructive 
instances may be summed up as follows : The con- 
sumer escapes that part of the tax which flows into 
the treasury on purchases of commodities actually 
imported : (a) When the amount of the commodity 
produced in the country laying the tax is sufficient 
in quantity to entirely supply the home market and 
to fix the price very close to the cost of production, 
while the foreigner has at the same time so large a 
supply that he must enter that market to dispose of 
it. In this case, if any revenue at all Trr , .. , 

J When the for- 

accrues to the government, it is clear eignerpays 
that it is paid by the foreigner, who is the whole tax ' 
burdened by the whole tax and may lose more, — 
more, that is, if his entrance into the market still 
further depresses the price. The home producer gets 
no subsidy. A commonly cited example of this is the 



190 INTRODUCTION TO PUBIIC FINANCE part n 

case of rye in Germany in good years when the out- 
side crop is also good. (5) When a new tax is laid 
„,, , . on goods produced by the aid of a large 

The foreigner ° r J ° 

pays the tax fixed plant for a limited market which 
emporaiiy. wou ] x j be \ os ^ if ^he price were raised. 

As long as the producer is unable to change the 
nature of the plant, he must pay the tax. An ex- 
ample is found in the iron products from the Rhine 
districts prepared for the trade as " Sheffield " cut- 
lery. England could in this case tax the foreigner 
until such time as he could change the character of 
his product, (e) In the case of commodities that are 
used only as the substitutes for something else be- 
cause cheaper, and which would, if the price rose 
m . , . higher than that of the commodity for 

The foreigner & J 

pays a part or which they are used, not be consumed at 
0/ ax. a -Q^ j n ^ g cage ^ e foreigner pays a 

part or the whole of the tax when the alternative 
commodity is cheap. For example, rye in Germany 

The foreigner when wneat is cheap, especially if at the 
pays a part of same time the crop of rye is short, (t?) 
In the case of commodities a large part 
of whose total consumption is produced in the coun- 
try, but not enough to absolutely fix the price, which 
is still above the cost of production. The foreigner 
in that case may pay part of the tax, since his arrival 
The speculator depresses the price. (/) The speculator 
pays the tax. regularly pays the tax in those frequently 
recurring instances when the commodity is massed 
in warehouses on the border ready for importa- 



chap, vii CUSTOMS DUTIES 191 

tion on a rise in the price, and on being imported, 
at the order of various speculators, in large masses 
depresses prices again. It is a pretty well-estab- 
lished fact, from the investigations of Cohn and 
Kandtorowicz, that the speculators on the Exchange 
as a whole lose more than they gain. This loss is in 
part the consumer's gain through the relief from 
taxation. 1 

Sec. 7. Customs duties regarded merely as a 
source of revenue depend upon the same principles 
exactly as those which underlie excises used for 
that purpose. The greater revenue is obtained 
with the least expense from a feiv simple duties 
upon important commodities. 

Technically, customs duties are of two kinds, ac- 
cording as they are levied upon goods in bulk irre- 
spective of their value, or the contrary. .,. 

r J Specific and 

This technical distinction is of great im- ad valorem 
portance in determining the incidence of u ies ' 
these taxes. Duties levied according to the value of 
the imported commodities are known as ad valorem; 
those according to weight, bulk, or other unit of 
measurement, are known as specific. The latter fall 
most heavily upon the coarser or cheaper grades of 
commodities. Such a tariff is, therefore, regressive 
and contrary to the spirit of many consumption tax 

1 See the masterly treatment of the whole of this intricate sub- 
ject by Lexis, "Handel," in Schonberg's Ilandbuch, 2ded., Vol. II., 
XXL, sec. 77; also Conrad, in his Jahrbuch, XXXVII. ; Cohn, 
" Zeitgeschafte und Differenzgeschafte," in HildebraiuV s Jahr- 
bnch, VII., p. 388 ; brought down to date in 1890 by Kandtorowicz. 



192 INTRODUCTION TO PUBLIC FINANCE part ii 

systems, which usually tax luxuries more heavily than 
other commodities. But the great saving in expense, 
and the great ease of collecting and administering 
ad valorem duties, go a long way in recommending 
them. Ad valorem duties demand more machinery 
of administration, as, for example, the certification 
of the consul in the place where the goods come 
from to the correctness of the invoice, a corps of 
appraisers, and a careful examination or inspection 
of all incoming goods. Little of this is necessary 
in the case of specific duties. Specific duties are 
now retained mainly for simple commodities of uni- 
form value per unit, or for rough groups of articles, 
whose value is easily ascertained. 

The watching of the frontier and the prevention 

of smuggling is one of the primary difficulties that 

have to be overcome in the administra- 

Smugqling. 

tion of customs duties. Goods of high 
value and easily portable are not very well adapted 
to pay such duties, unless they can be obtained only 
from distant countries and are thus easy of identifi- 
cation. Whenever there is a heavy excise on any 
commodity there is generally a correspondingly 
heavy customs duty as well. Sometimes the im- 
ported commodity pays both the duty and the excise 
or a part of the excise. 

The political or protective element in customs 
duties has been gradually retreating in importance, 
and the fiscal has correspondingly advanced. Stein 1 
1 Vol. II., Part II., p. 377. 



chap, vii CUSTOMS DUTIES 198 

makes this the sole law in the history of customs 
duties. It would be best characterised as an ad- 
vance of the fiscal interest, leaving the The rise of im- 
political or protective interests the same f, 0? t( * nce °* m 

r r the fiscal prin- 

ts before. The pressing wants of na- tipie. 

tions, and the fact that federal governments have 
been well-nigh confined to these taxes, has necessi- 
tated this advance. 

Sec. 8. We may now look at some examples of 
customs duties. Those of England are particu- 
larly instructive. 1 The term "con- „. . 

J History of cus- 

suetudines,'" or customs, applied to the toms duties in 
duties levied upon imported and ex- ng an ' 
ported commodities even before the Magna Charta, 
bespeaks their antiquity. In the time of the Nor- 
man kings, however, trade was insignificant and the 
duties not very productive. The original duty on 
wine was one cask from every cargo of between 
ten and twenty casks, two from twenty or more. 
What the original duty on wool was is not known. 
Finally the system settled down to a 5 per cent tax 
on all imports and exports. Down to 1700, these 
duties were entirely for revenue purposes and had no 
intentional protective features. At one time their 
yield was nearly £1,500,000. The eighteenth cen- 
tury saw a changed policy. Special protective and 
prohibitive duties were established. This was 
the policy of the entire century, except during the 

1 See Hall, History of the Customs Bevenue, and Dowell, History 
of Taxation. 



194 INTRODUCTION TO PUBLIC FINANCE part ii 

" long peace " of Walpole, 1722-1739. By 1759, the 
general charges were 25 per cent, while many 
commodities, like tea, coffee, sugar, wines, and 
spirits, paid even more. The expenses of the 
wars which marked the turn of the century 
led to a general increase of charges on revenue- 
yielding commodities. Yet with all the many in- 
creases in the tax charges there was not a corre- 
sponding increase in revenues. In some cases, the 
high duties of the war period exceeded the limit of 
what the goods would bear. For example, sugar 
paid duties ranging from 20s. to 39s. per hundred- 
weight during the first fifteen years of the nineteenth 
century. But the annual income was least when the 
duties were highest. Consumption fell off half a 
million hundredweight under the higher price. It 
must be noted that this result was obtained in the 
case of a commodity not produced in the country it- 
self. Salt, also, bore a heavy duty in this period to 
the lessening of the consumption. Tea, coffee, to- 
bacco, wine, and other foreign products were also 
subject to revenue duties so high as to be close to, 
if not beyond, the limit of greatest productivity. 

Interesting and instructive is the experience of 
England with protective duties. Export duties on 
„ , , raw material, or the prohibition of the 

protective exportation thereof, as in the case of 
wool, was originally one of the most 
prominent features of the English system. From the 
middle of the seventeenth century down to 1825 the 



chap, vii CUSTOMS DUTIES 195 

exportation of home-grown wool was forbidden. 
Until 1802, however, the importation of wool was 
free. Then the import duty rose rapidly from 5s. 
3d. per hundredweight, in 1802, to 56s. per hundred- 
weight, in 1819. To encourage the production of 
raw silk, heavy duties were placed upon that com- 
modity in 1765, and not lessened until 1825. Linen 
manufacture was encouraged by bounties. 

The chief battles over the customs duties in 
England were waged around the "corn-law." 1 
Two things among others of minor importance 
seem to have contributed mainly to the establish- 
ment of protective duties on bread-stuffs. 2 The 
first was the existence of heavy public burdens upon 
land, and the desire to compensate land owners and 
land users therefor. The other was the desire to 
make England as independent as possible of all 
foreign nations for her food supply, and to keep 
even the poorer lands in cultivation. According to 
the advocates of this policy, protection was needed 
to enable the proprietors and tenants to buy manu- 
factured products. It was the political power of the 
proprietors that enabled the policy to be maintained. 
The various tariffs that prevailed may be conven- 
iently summarised as intended generally to maintain 
a chosen price, which it was assumed would enable 

1 The American student must bear in mind that in England 
"corn" means wheat, or, in general, bread-stuffs. 

2 See McCulloch, Taxation, p. 206 ; Wilson, National Budget, 
pp. 62 ff.; Levy, History of British Commerce, 2d ed., Part II. , 
Chap. 7 ; Band, pp. 207 ft'. 



196 INTRODUCTION TO PUBLIC FINANCE part n 

the producer to live, and would not place too heavy 
a burden on the consumer. Hence the frequent re- 
course to a sliding scale by which a higher duty was 
imposed as the price fell. The best example is the 
scale adopted by Sir Robert Peel (5 and 6 Vict. c. 
14), by which the duty was to be 20s. per quarter 
when the price was 50s. and 51s., and decreased Is. 
per quarter for every rise of Is. in price; so that 
the duty should only be Is. per quarter when the 
price rose to 70s. and over. The idea was, clearly, 
to maintain, if possible, a price of at least 70s. A 
similar purpose underlay the earlier prohibition of 
importation, until the price rose above 80s. per 
quarter. 

Popular agitation, headed by the Anti-Corn Law 
League, was based upon the hope of cheaper food 
The eiimina- supplies. It was supported by the rapidly 

tion of the • £ , • • , . • . i 

, \. growing manufacturing interests in the 

protective o & & 

features. expectation that cheaper food would re- 

sult in a fall in wages. After years of effort, it 
brought about the repeal of the corn laws in 1846. 
The sympathy aroused by the Irish famine of the 
same year contributed to this end. Just before 
the repeal of the corn laws Peel had, in 1842, 
simplified the whole tariff by eliminating many 
of the protective features, especially by remov- 
ing duties on raw material and freeing a num- 
ber of small articles. As a substitute source of 
revenue the income tax was restored. Gladstone, 
in 1860, completed the removal of protective feat- 



chap, vii CUSTOMS DUTIES 197 

ures. Since that time it has been true, in the words 
of Bastable, that "the English customs system is 
remarkable for its vigorous adherence to the prin- 
ciple of purely financial duties. All traces of a polit- 
ical aim in the imposition of customs duties have 
now disappeared." Customs yielded £20,164,114 
in 1894 from the following articles: — 

Spirits: rum, £1,938,181; brandy, £1,364,058; 
gin, £154,088; others, £674,257; beer, etc., £14,- 
582; tea, £3,493,094; tobacco, etc., £10,119,954; 
wine, £1,210,141; chicory, £57,130; cocoa, £102,- 
665; coffee, £164,985; currants, £120,977; figs, 
plums, and prunes, £55,135; raisins, £189,160; all 
others, £4,886. 

There are now only 40 rates in the English cus- 
toms tariff. In 1875 there were 53, as against 397 
in 1859, and 1046 in 1840. 

Sec. 9. The difficulty of administering customs 
duties in the small and scattered areas of the differ- 
ent States of Germany led to the for- mi „ 

J The German 

mation of the German customs union customs 
(Zollverein) in 1833. This union, which union - 
at first embraced a population of 25,000,000 and a 
territory of 80,600 square miles, grew in size and in 
permanence with the renewal, from time to time, 
of the treaties which bound together the States 
composing it, and with the entrance of new States, 
so that in 1854 it embraced 98,000 square miles 
and 35,000,000 inhabitants. It was the core of 
the present German Empire. At the beginning 



198 INTRODUCTION TO PUBIIC FINANCE part ii 

the moderate, mainly revenue, duties of Prussia 
were adopted. In the tariff of 1865 the rates 
were lowered and many removed. Duties on grain 
and on almost all raw materials were removed, and 
the duties on manufactured goods reduced. The 
free-trade tendency which accomplished this change 
lasted until long after the formation of the Empire, 
indeed, down to 1877. 

The constitution of the Empire confers upon the 
Imperial legislature the exclusive power to regulate 
customs. It may levy taxes to any amount upon 
The customs a ^ articles exported or imported, for 
of the Empire, revenue purposes or for protection or for 
both. But the Imperial legislature cannot tax any- 
thing else. Further revenues, if needed, can be 
raised in the form of an apportioned requisition 
upon the commonwealths of the Empire. The 
growing need of the Empire for revenues was ac- 
companied by a wave of protectionist sentiment, so 
that the increased duties were more and more pro- 
tective in character. It is true, however, that the 
revenue features were increased at the same time. 

Particularly interesting is the duty on grain, intro- 
duced in 1879, and raised several times since then. 
The rate is now 5 M. per 100 kilograms for wheat 
and rye, 4 M. for oats, 2J M. for barley. These 
duties are in some measure protective in ordinary 
seasons. It is frequently found that a part of the 
revenue which flows into the treasury from this 
source, especially in extraordinary years, is paid by 



chap, vii CUSTOMS DUTIES 199 

others than the consumer. 1 Generally, however, 
the consumers pay the home producers a goodly sum 
in the shape of higher prices. The operation of 
these grain duties has been materially modified in 
recent years by the conclusion of commercial treaties 
with some of the grain-producing countries. The 
main revenues from customs duties in the Empire 
come from coffee, tobacco, wine, and grain. 

Sec. 10. France has a highly developed system 
of customs duties. By the edict of 1664 Colbert 
attempted to reduce to a single uniform History of the 
scheme all the confused and multifarious French tariff. 
customs charges that had come down from feudal 
times and were in the hands of many different 
authorities. The tariff thus established was pro- 
tective in character and was dictated mainly by the 
mercantile doctrine. But many provincial duties 
were left, and as time went on confusion increased. 
The Revolution swept all the old taxes away, and in 
1791 the system which is the basis of the present 
one was established. 

The development since then has been gradual. 
Prohibitions of imports and exports, so numerous in 
the tariffs of the ancient monarchy, have now all 
been removed. Since 1863 the only exceptions to 
this statement are books that infringe the copyright 
law and munitions of war. To ensure the proper 
registration, for statistical research, of all traffic, 
there used to be an import charge on all goods of 
1 See examples cited above, also Colin, pp. 565 ff. 



200 INTRODUCTION TO PUBLIC FINANCE part n 

15 centimes per 100 francs' worth or 50 centimes per 
100 kilograms, and an export charge of 25 centimes 
per 100 kilograms. These have been removed. 1 

During the period subsequent to the Revolution, 
and down to 1814, war measures left no opportunity 
to test the tariff of 1791. The Restoration estab- 
lished a highly protective system at the instigation 
of the Chambers. The Second Republic continued 
the same policy. Napoleon III., finding himself 
unable to persuade the deputies to change the tariff, 
removed many of the prohibitive duties by treaties. 
The first of these treaties, with England in 1860, 
fixed the maximum ad valorem duty on English goods 
at 30 per cent for the first four years and 25 per cent 
after that. Other treaties followed extending similar 
privileges to other countries. In the spirit of these 
treaties the tariff itself underwent many amend- 
ments, raw products were admitted free, duties on 
foods were removed or lowered, and the duties pro- 
tecting the stronger manufactures were lowered. 
By 1873, that is, after the struggle with Germany 
was over, and after the revenue system had been 
rearranged to meet the tremendous burden which 
The two tar- was the consequence of the war, France 
iff 1 *- had two distinct tariffs. First, the gen- 

eral tariff built upon the law of 1791 amended 
many times. Second, a conventional tariff based 

1 On the whole subject see Levasseur, "Recent Commercial 
Policy of France," Journal of Political Economy, Vol. I., No. 1, 
December, 1892. 



chap, vii CUSTOMS DUTIES 201 

upon treaties. Since these treaties generally con- 
tained the clause granting each nation the same 
privileges as the most favoured, this tariff was more 
uniform than the method of construction would lead 
one to expect. In 1881 the general tariff was pretty 
thoroughly revised so as to approach the treaty tar- 
iff. Manufactures were slightly protected. With 
this as a starting-point new treaties were made. 

One of the most remarkable reforms that any 
tariff has ever undergone was accomplished in 1892. 
This was the passage of two tariffs in a The tariff re- 
single law. There was first a general form of 1892. 
tariff or maximum which was to be levied on goods 
from all countries not obtaining special privileges 
by treaties. Second, a minimum tariff marking the 
lower limit to which the concessions might go. The 
latter was to be applied to the native products of 
those countries which grant French products re- 
ciprocal privileges. Both of these tariffs were pro- 
tective. There are over 700 items in the maximum 
tariff, but the number on which concessions could be 
made was considerably less. 

Sec. 11. The tariff history of the United States 
has been written many times. 1 Its effects have been 
explained in many different ways. Not m . ~ , . , 

r j j Tariff history 

one of the many histories is clearer and of the United 

more impartial than the short statement a es ' 

by Professors Seligman and R. Mayo Smith, printed 

1 Sumner, History of Protection in the United States; Taussig, 
Tariff History of the United States, 1789-1888. 



202 INTRODUCTION TO PUBLIC FINANCE part ii 

(in English) in the publications of the Verein fur 
Socialpolitik, 1892 (Vol. XLIX., Part 1). Nothing 
but the barest outlines can be attempted here. 

The colonial policy of England prohibited the ex- 
portation of the more important commodities, the 
" enumerated " articles, to any country but England. 
Importation was to take place only from British 
ships. As was seen in the chapter on protective 
expenditure, bounties were paid to encourage agri- 
cultural products. The only import duty in the 
colonies was that imposed in 1773 on rum, molasses, 
and sugar from other than British colonies. 

After the war of Independence there was a move- 
ment to protect the new industries which had sprung 
up. As Congress did not, until the adoption of the 
new constitution in 1789, have the power to collect 
duties, the commonwealths tried to afford the de- 
sired protection. There is naught but confusion in 
these efforts, all of which, however, came to an end 
when the commonwealths were forbidden to levy 
customs duties. 

The tariff was the sole source of tax revenue which, 
the new federal government had. It was, conse- 
The beginning quently, largely utilised from the first. 
of the tariff. Down to the close of the war of 1812 the 
tariffs were, in effect, if not in intention, revenue 
and not protective tariffs. The rates were generally 
low, except on purely revenue articles like sugar, 
tea, coffee, and wine. The Orders in Council, the 
Berlin and Milan decrees, on the east side of the 



chap, vii CUSTOMS DUTIES 203 

Atlantic, and the Embargo and Non-Intercourse 
acts, on the west side, followed by the war of 1812, 
gave absolute protection to American industries and 
seriously lessened the growth of the customs revenue 
of the government for a period of seven years. It is 
not surprising, therefore, to find the new industries 
which had been forced into existence during that 
time calling loudly for protection after the peace. 
A strong protectionist sentiment arose which in- 
itiated a policy that had scarcely more than a 
temporary setback from 1816 to 1895. mi -. ■ . 

r J 1 he beginning 

That policy was to combine high pro- of the protect- 
tective duties with important revenue lve p0 lcy ' 
duties. The main arguments advanced for and 
against the policy of protection have been stated 
under Expenditure. The industries protected were 
the textiles, cotton and wool, and iron. Among 
the revenue duties may be named those on tea, 
coffee, and wine, and perhaps those on sugar and 
tobacco. The first period of the protective policy 
passed the highwater mark in 1828. 

The only important setback which the policy 
sustained before the recent tariff, was in the so- 
called free-trade period from 1846 to 1860. The 
act of 1846 was heralded as a tariff for revenue 
only, but it was still highly protective. Th u , 
The duties on the classified commodities free-trade 
ranged from 5 per cent to 100 per cent ; perw 
the last on spirits. Some purely revenue duties 
were removed entirely, as, for example, the duty on 



204 INTRODUCTION TO PUBLIC FINANCE part n 

tea and coffee. The protected textile industries re- 
tained their duties for the most part ; woollens 20 
to 30 per cent, cottons the same, iron 30 per cent. 
All the duties were made ad valorem, a change which 
involved an increase in the cost of administration. 
A more substantial reduction was made in 1851. 

The crisis of 1857 resulted in a serious decline in 
the revenues, and just before the civil war broke 
The Morrill ou ^ Congress passed the so-called Mor- 
tarijf. r in tar if^ March 2, 1861. This tariff in- 

creased the protective duties, especially on iron and 
woollens. From the technical side this act made two 
changes of note. First, specific duties were again 
restored, second, the system of so-called compen- 
sating duties was initiated. This second feature, 
which afterwards received a very broad application, 
can best be made clear by an illustration. The 
Morrill tariff increased the duty on raw wool. To 
compensate the manufacturers for this, a specific 
duty, supposed to represent the duty on raw ma- 
terials, was placed on manufactures of wool, to- 
gether with an ad valorem duty for protection. 

Immediately after the passage of the Morrill act 
the war broke out. Under the pressure of the need 
for revenues Congress passed a long series of acts 
The war tar- increasing the duties on purely revenue 
i ff s - articles, putting duties upon articles 

hitherto free, and raising as compensation the pro- 
tective duties. The idea of giving compensatory 
duties was extended to cover the burden of internal 



chap, vii CUSTOMS DUTIES 205 

taxes also. Thus the manufacturers were, in 1864, 
given special compensatory duties to offset the heavy 
internal taxes. This remarkable protectionist meas- 
ure, embodied in the act of 1864, was rushed through 
Congress with only one day's discussion in each 
house. It represents the highest limit ever reached. 
Nearly 1500 articles were enumerated ; the average 
rate was close to 50 per cent. It shows the effect 
of three different forces : there was (1) the desire 
to increase the revenues ; (2) the feeling that the 
manufacturer had a good claim for compensation for 
the high taxes in general ; (3) the mad scramble 
to gain all that could be gained from this class of 
legislation. 

This act afterward received a number of amend- 
ments to meet the changes made in the other parts 
of the revenue system, but the character of the tariff 
was not materially changed until 1883. One of the 
most interesting changes, technically, was the fixing, 
in 1866, of the method of ascertaining the value 
upon which the duty was laid. It was provided that 
the value should be determined by adding to the 
value, at the place of shipment, the cost of trans- 
portation, packing, commission, warehousing, and 
other charges which fell upon the goods before 
their arrival. 

The protection policy thus extended gave strength 
to vested interests which thereafter sup- 

Modifications. 

ported that policy, lhe only changes 

of note down to 1894 are the attempted reforms 



206 INTRODUCTION TO PUB II C FINANCE part n 

of 1870, 1873, and 1883, and the McKinley tariff of 
1890, which reduced the income by removing the 
duties on purely revenue articles and on very strong, 
self-sustaining industries, but increased the protec- 
tive features. 

In 1894 came a change that is very important. 
The McKinley bill of 1890 had become practically 
„ , ,. , the platform of the Republican party, 

Reduction of r * r j •> 

protective and the Democratic party went into 
power pledged to the reduction of protec- 
tion. They proceeded slowly to the fulfilment of 
these pledges. The famous Wilson bill was re- 
ported Dec. 19, 1893, and became a law Aug. 27, 
1894, without the approval of the Democratic Presi- 
dent. It failed of his approval because of the ob- 
jectionable features introduced in the Senate. Two 
things prevented the change from being sweeping. 
The first was the power of the vested interests in 
the protected industries. Every sort of pressure, 
short of illegal, was brought to bear in favour of 
the existing system. The second was the patent 
danger of too sudden a decrease. Sweeping reform 
would ruin industries and create a depression. 

The changes may be roughly summarised as 

follows. Forty-five articles previously taxed were 

A , . . put on the free list. Am oner these the 

Analysis of r ° 

the recent most important was wool. The duties 
reforms. on woo ;Q ens we re " compensatingly " re- 

duced to an average of about 40 per cent as against 
the old average of nearly 100 per cent. Copper was 



chap, vii CUSTOMS DUTIES 207 

made free, as was also lumber. Iron ore was, after 
a struggle, left dutiable. The chief feature of the 
McKinley bill had been the removal of the duty on 
sugar. This was restored to the tariff with a duty 
for the sake of the revenue. On all the rest of the 
list the duties were reduced by from 20 per cent to 
40 per cent. It is well-nigh impossible to summarise 
the result further; the items are too numerous and 
there is a lack of guiding principles. The reduc- 
tions carry the tariff lower than it has been at any 
time since the war. The level of 1857 has been 
reached but in a very few instances, though in some 
cases a lower limit has been reached. The im- 
mediate result was a material falling off in the 
revenues. This is, however, due to the coincidence 
of the reduction with a serious industrial depres- 
sion and will probably not be permanent. 



208 INTRODUCTION TO PUBLIC FINANCE part n 



CHAPTER VIII 

PROPERTY TAXES 

Part 1. The Creneral Property Tax. 

Section 1. In the general property tax the 
basis is the entire amount of property, real and 
Th th f P ersona ^ owned by the tax -payer. It 
the general is usually paid out of the income of the 
proper y ax. tax-payer derived from any source, but 
inasmuch as it forms a lien on the property it may 
be paid from that. The tax rests, theoretically, 
upon one of two ideas : (1) that property measures 
faculty ; (2) that property measures benefit. In the 
older forms of this tax, when there was little oppor- 
tunity to buy or sell land, or to invest capital, it 
was pretty generally true that property did meas- 
ure faculty. In modern times the theory that 
benefit can be measured by property has led to the 
retention of the tax. The fallacy of that theory has 
been shown. 

The general property tax is, as we have seen, very 
old. It is still the main reliance of Switzerland and 
the United States for supplying the revenues of the 
component parts of the federal systems. Prussia and 
Holland have recently reverted to it. This reversion 
to a form of taxation which has been the subject of 



chap, viii PROPERTY TAXES 209 

almost universal condemnation suggests the necessity 
of re-examining the grounds upon which those objec- 
tions were based. Among many there are two of 
great importance. (1) It is urged that the tax is 
unjust because property forms no criterion of tax- 
paying ability. It is maintained that objections to 
income is a far better basis. (2) It is this tax - 
urged that the general property tax is inexpedient 
because so difficult to administer justly, especially 
in the matter of the discovery and assessment of per- 
sonal property and because of its effect on the move- 
ment of capital and forms of investment. Against 
these serious objections it is urged that when there is 
a tolerably just system of income taxation already in 
existence a property tax in addition thereto fulfils the 
requirements of justice because it imposes a heavier 
burden on " funded " income, which is regarded as 
indicative of more faculty .since it is less precarious. 
It also supplements the income tax by making prop- 
erty in enjoyment, the use of which is an indication of 
tax faculty, a part of the base, as for example picture 
galleries. And, lastly, the comparative steadiness of 
the return from the property tax is a great recom- 
mendation from the fiscal standpoint. It would 
seem, then, that the objections to the general property 
tax as the main part of a system still stand, 
but that there may be room for such a when this tax 
tax as a subordinate par,t of a larger sys- is justifiable. 
tern, the demands of justice being met by the proper 
relation between the different parts of the system. 



210 INTRODUCTION TO PUBLIC FINANCE part n 

In Switzerland and Prussia the general property tax 
is part of a more elaborate system. In the United 
States it stands almost alone for commonwealth pur- 
poses, supplemented in a few isolated instances by 
other taxes intended to reach certain forms of reve- 
nue-yielding property. The universal condemnation 
of the American commonwealth general property tax 
is therefore not due to the defects in the tax itself, 
but mainly to the fact that it is not properly supple- 
mented by other taxes. 

The first question that arises when the general 
property tax stands alone, and a question which 
although not so prominent also arises in other cases 
Can the as- is : Can the method of assessment be 
sessmen < ma de sufficiently effective to reach all 

properly J 

made? forms of property, especially personal 

property ? The answer to this question that has been 
given by the experience of all nations, is emphati- 
cally in the negative. This is especially true when 
the administration of the assessment is left to offi- 
cials popularly elected for a short term. It is also 
in the negative, but somewhat less unanimously so, 
when the assessment is under the control of an 
impartial bureaucracy appointed by a monarch or 
holding office practically for life. In the United 
States it is notorious that almost all personal prop- 
erty escapes. 

The report of the extensive investigations of the 
Eleventh Census (1890) into the matter of local and 
commonwealth taxation has just been published. 



CHAP. VIII 



PROPERTY TAXES 211 



The census office undertook to ascertain the true 
value of property, i.e. its fair selling value. This 
serves as a basis of comparison for the . 
assessed values. The investigations of the United 

,1 -i , j •,] it , States fails. 

the census were conducted with the ut- 
most care, and although they inevitably contain 
many unavoidable sources of error they are yet 
very serviceable. The following table shows the re- 
sults of the investigations into the true value of 
property: 

Real estate, with improvements thereon . . $39,544,544,333 

Live-stock on farms, farm implements, and 

machinery 2,703,015,040 

Gold and silver coin and bullion . . . 1,158,774,948 

Mines and quarries, including product on hand 1,291,291,579 

Machinery of mills, and product on hand . 3,058,593,441 

Railroads and equipments, including street rail- 
roads 8,685,407,323 

Telegraphs, telephones, shipping, canals, and 

equipment 701,755,712 

Miscellaneous 7,893,708,821 

Total $65,037,091,197 

The total assessed valuation was 125,473,173,418 
or about 40 per cent (41 per cent if we allow 
for $3,833,335,225 exempt by law). Of real 
estate, — land and its improvements, — the true 
value was 139,544,544,333, of which all but 
$3,833,335,225 is legally subject to taxation; the 
assessed value of the $35,711,209,108 taxed was 
$18,956,556,675, a little over 50 per cent of its 
true value. The $25,492,546,864 of personal prop- 



212 INTRODUCTION TO PUBLIC FINANCE part ii 

erty was assessed at $6,516,616,743, about 25 per 
cent. But if we make allowance for the #1,291,- 
291,579 worth of mines and quarries which might 
be well classed as real estate, personal property is 
assessed at about 22^ per cent of its true value. 
As the statement of the total amount of personal 
property errs admittedly on the side of moderation, 
there being some forms which were not ascertain- 
able, this showing is more favourable to the assess- 
ment than the truth would be. It is well within 
the truth to say that in the United States as 
a whole not more than 20 per cent of personal 
property is taxed. Probably considerably less than 
this is the true figure. In many important com- 
monwealths the assessment of personal property even 
according to the favourable showing of the census 
is far below the average for the whole country. In 
the country as a whole, personal property is about 
71 per cent of real estate or 41^ per cent of 
all taxed property. In New York it is assessed 
at a trifle over 11 per cent of the real estate and 
about 10 per cent of all property. According to 
the census valuation there was in New York $5,817,- 
704,667 worth of real estate and $2,758,997,324 
worth of personal property. Real estate was as- 
sessed at $3,403,751,246, or about 58 per cent 
of its real value, while personal property was as- 
sessed at $382,159,067, or not quite 14 per cent 
of its real value. When it is remembered that 
the census report omits some unascertainable items 



chap, vi 1 1 PR OPER T Y TAXES 213 

of personal property it is fair to say that 90 per 
cent of the personal property in New York is un- 
taxed, where at the same time only 42 per cent 
of real estate is untaxed. This means that the 
assessment of personal property is evaded and that 
real estate is assessed below its actual value. The 
latter fault is not so bad as the former because gen- 
eral under-assessment means merely a higher rate 
than would otherwise prevail, but does not affect 
the distribution of the burden. Pennsylvania, Mas- 
sachusetts, and Ohio show somewhat better assess- 
ment of personal property. Thus in Pennsylvania 
the assessed value of personal property is 618 mill- 
ions against 2042 millions of real estate ; Massachu- 
setts, 554 millions against 1600 millions; Ohio, 546 
millions against 1232 millions. But no one supposes 
that there is any more personal property owned in 
these commonwealths than in New York. In fact 
the contrary is the case. In some of the newer west- 
ern States the assessment of personal property is 
larger than the assessment of real estate. Thus in 
Montana personal property is 58 millions, real estate 
55 millions; in Wyoming the ratio is 20:13; New 
Mexico, 28 : 15 ; Arizona, 18 : 10 ; Nevada, 17 : 9 ; 
Idaho, 16 : 10. But this is easily explained. (1) In 
these States, land values have not yet developed. 
(2) The real property assessed is only such lands, 
with their improvements, as have fully passed into 
the hands of private owners. (3) Personal property 
is swelled by including in it the improvements upon 



214 INTRODUCTION TO PUBLIC FINANCE part n 

public lands the fee to which is still vested in the 
United States, and upon railroad lands the title to 
which is still vested in the railroad companies. 
(4) The list of personal property is swelled by the 
nature of some of the industries that prevail, — cattle. 
A certain amount of it is due to the assessment of rail- 
road property as personal property. (5) The possibil- 
ity of concealing property is less in a country where 
population is sparse and the conditions for invest- 
ment well known to the assessors. (6) The need of 
revenues is very great and real estate has not 
enough value to bear the burden. Personal prop- 
erty must, therefore, be called in to raise the neces- 
sary amount without inordinately high rates. The 
chart on the opposite page taken from the Eleventh 
Census shows the relative assessment of personal 
and real property in all the States. 

The failure to assess personal property is due en- 
tirely to the laxity of administration ; the tax laws 
The failure to on the subject are universally strict 
reachpersonai enough to answer every requirement. 

property not 

due to faults What constitutes personal property is 
in the laws. explicitly stated ; the assessors have 
ample power to ascertain its exact amount. In 
a large majority of commonwealths (all but four- 
teen) the tax-payer is required to make a declara- 
tion of his property. In all the States the assessors 
have the advantage of large powers of investiga- 
tion, and can ascertain the amount of the prop- 
erty if they will assert their power. But this is 



CHAF. VIII 



PROPERTY TAXES 



215 



ASSESSED VALUATION OF PROPERTY TAXED. 



Real Estate. 



States, 



Personal 
Property. 





















le ValJe 






| | 










As 


J 1 




ess 


me 


it 





Real Estate 
Personal 

Real Estate 
Personal 




N.Y. 

PENN. 
MASS. 
OHIO 
CAL. 
MICH. 
MO. 
ILL. 
N.J. 
IND. 
TEXAS 
MINN. 
WIS. 
MD. 
KY. 
IOWA 
TENN. 

VA. 
CONN. 
R.I. 
KAN. 
ME. 
GA. 
WASH. 

LA. 

COLO. 

ALA. 

N.C. 

N.H. 

D.C. 

W.VA. 

MISS. 

NEB. 

VT. 

ARK. 

OREG. 

S.D. 

s.c. 

UTAH 
N.D. 
DEL.. 

FLA. 
MONT. 

N.M. 

WYO. 

ARIZ. 
IDAHO 

NEV. 



216 INTRODUCTION TO PUBLIC FINANCE part n 

what locally elected assessors are very reluctant 
to do. 

The questions as to the expediency and justice of 
a progressive rate, as to the exemption of small 
properties, and the like, have already been treated. 
The assess- The advisability of extending the as- 
ment of legal sessment to legal persons so as to cover 

persoiis under . 

the general a certain amount oi property that might 
property tax. escape in the guise of personal property, 
depends upon the strictness in the assessment. The 
stocks and bonds of railroad companies are easily 
concealable personal property of the individual stock- 
holder. But the road and buildings are easily ascer- 
tainable real property of the companies. For ease 
of assessment, therefore, it is best to tax legal per- 
sons as well as real persons. But in that case stocks 
and bonds in the hands of private persons should be 
exempt, unless it is intended to tax such property 
more heavily than other property ; i.e. to introduce 
a partial progression. Whether in addition to in- 
cluding legal persons in the general property tax a 
special corporation tax should be imposed is a ques- 
tion of policy affecting the whole tax system. 

When the general property tax stands alone, all 
The taxation tax faculty that exists in the form of 
of faculty in receipts of the economic character of 

the form of 

wages not ac- wages, — salaries, fees for professional 
compiished. services in independent professions, 
profits and earnings of management, — are untaxed. 
In the earlier forms of the property tax in the 



chap, vin PROPERTY TAXES 217 

United States this omission was seen, and a special 
tax levied upon such income. But at present that 
method of taxation has almost entirely disappeared. 

The technical arrangements for the assessment of 
this tax vary very much. In some cases the method 
of rather permanent cadastres is feasible 
for a large part of the property. It is 
necessaiy to make an annual investigation into the 
amount of personal property held by the different 
tax-payers, inasmuch as this changes very rapidly. 
But there is less necessity for such revision in the 
case of the real estate. A very simple cadastral sys- 
tem with revision every five, ten, or fifteen years, is ' 
in use in a good many commonwealths of the United 
States for commonwealth taxation, but annual as- 
sessments are in vogue for almost all local pur- 
poses. Thus, in Rhode Island, the Assembly fixes 
the assessment or apportionment of the common- 
wealth taxes whenever there seems need of revision ; 
in Michigan it is done once in five years ; in Ver- 
mont once in four years ; in Ohio once in ten years. 
No matter what changes may, meanwhile, occur in 
the value of property in the towns, the share of 
each remains the same for commonwealth purposes. 
Most of the commonwealths, however, require the 
regular addition of improvements and alterations. 

Sec. 2. The property tax as the sole Scientific 
or chief form of direct taxation has no {™ gmen , 

the general 

supporter among scientific writers. So property tax. 
universal and unanimous has been the condemna- 



218 INTRODUCTION TO PUBLIC FINANCE part n 

tion heaped upon this tax that we must consider 
in detail some of the objections that have been 
raised. 

Professor Seligman sums up his interesting dis- 
cussion of this tax in words to the following gen- 
eral import : 

The general property tax is a failure as the main 
source of revenue from the triple standpoint of 
history, theory, and practice. 

1. Historically, it was once well-nigh universal. 
In a community mainly agricultural it was not 
altogether unsuited to the conditions. But as soon 
as industry and commerce became important, it 
failed to extend so as to comply with the require- 
ments of justice. It became in fact, even where 
not so considered, a tax on real property. Every- 
where but in America it has been (j£) divided into 
a number of subordinate property taxes, (Z>) allowed 
to become a subordinate member of another system, 
or (c) entirely abandoned. Sooner or later it will 
have to be abandoned in America. 

2. Theoretically the general property tax is defi- 
cient in two respects. First, it assumes that there is 
an ascertainable general property. But since prop- 
erty is a composite of inseparable but widely differ- 
entiated elements this assumption is contrary to the 
fact. " The general mass of property has disap- 
peared and with it vanishes the foundation of the 
general property tax." Secondly, " property is no 
longer a criterion of faculty or of tax-paying abil- 



chap, vni PROPERTY TAXES 219 

ity." Two equal masses of property may be 
unequally productive [because used by men of dif- 
fering talents, and thus differently joined with the 
personal element, or because the possession of them 
may give rise to fortuitous gains, or because the 
owner of one mass of property may be labouring 
under peculiar economic disadvantages]. 

It is the income which property yields that is the 
best index of the tax-paying power which the prop- 
erty represents. 

3. Practically, " the general 'property tax as act- 
ually administered to-day is beyond all peradventure 
the worst tax known in the civilised world." As at 
present administered it fails entirely to reach 
intangible property. It debases public morals by 
putting a premium on dishonesty. It is regressive 
and presses hardest upon those relatively least able 
to pay. 1 

This is strong language, — even stronger has been 
used. But no words are too strong to express the 
iniquities of this tax. 

Part II. Special property taxes. 

Sec. 3. The land tax is one of the oldest contri- 
butions. It has three forms : (1) it may be based 
upon each unit of area, sometimes with Forms of the 
an attempt to classify the different units land tax - 
in fertility; (2) it may be based upon the estimated 
value of the land or upon an estimated average 
1 Seligman, Essays, pp. 23-61. 



220 INTRODUCTION TO PUBLIC FINANCE part ii 

annual yield or surplus; (3) it may be based upon 
the actual yearly yield, and be as it were a share in 
the product. The tax was common in the latter 
part of the middle ages as a recognition of the 
monarch's right of proprietorship in the soil. A 
good example of this, among many others, is 
afforded by the so-called quit-rents in the American 
colonies. 1 In their first form these payments are 
not strictly taxes. They are acknowledgments of 
the people's tenure. But they frequently grow into 
taxes. In France, as we have seen, the taille devel- 
oped from feudal dues. The impot fonder now 
yields 255,000,000 francs. In England the old land 
tax has been converted into a redeemable rent 
charge, but the revenue from land is still taxed in 
the general income tax and yields X 1,500,000 annu- 
ally. Local taxation falls largely on land. In 
Prussia the land tax was in 1895 transferred en- 
tirely to the local bodies. 

Economic rent as the surplus of revenues from 
land, after all expenses have been deducted, has 
always been regarded as a legitimate object of 
taxation. It has been strongly argued that this tax 
cannot be shifted. But as the land tax is not 
always confined to rent-bearing land, being gener- 
ally imposed upon all land, even the poorest in cul- 
tivation, and as modern economic theory does not 
regard rent as an inevitable surplus, this old argu- 
ment needs thorough revision. (See Chapter X.) 
1 See Ripley, and Wood. 



CHAP. VIII 



PROPERTY TAXES 221 



It is in the assessment of this tax that the cadastre 

has been most widely used. The principles upon 

which the best cadastres have been 

i-i i c n s-\ s a pi Assessment. 

built are the following: (1) A caretul 

measurement of the land is made and recorded. 
In the older ones the land is entered in rough his- 
torical units: the "yoke," the "hide," the "seed." 
Sometimes the cadastre is intended to serve other 
purposes, as that of a record of titles. In any case 
the names of the owners or occupiers are entered 
with each piece. (2) A record is made of the yield 
of each unit of area and from that is estimated either 
the gross revenue or the net revenue, — more fre- 
quently the latter. As a rule the cadastral revenue 
is less than the actual net revenue. Another 
method is that of recording the market value. 

The cadastre when finished is subject to more or 
less frequent revision. A partial revision which 
involves the recording of changes of title, etc., is 
generally made currently. An entire revision is 
only undertaken after periods of considerable 
length. The making of a complete cadastre is a 
matter of considerable expense and takes no little 
time. In many cases more than the mere land 
is recorded, buildings and other improvements 
being frequently entered in the same cadastre. 

It is generally urged in justification Justification 
of the retention of the land tax even in °/ its J ete f^ 

by the side of 
countries where there are other taxes other taxes. 

that fall upon the revenue from land, that the in- 



222 INTRODUCTION TO PUB II C FINANCE part n 

come accruing from land is constantly increasing in 
every growing community, and that the expenditure 
of the government accrues largely to the benefit of 
the land-holders, and appears in the form of an in- 
creased value or rental. The same reasons are 
urged in support of a higher rate for the land tax. 

On the basis of a cadastre the land tax is gen- 
erally apportioned ; less frequently it is propor- 
tioned. In general the tax lends itself better than 
most others to the apportionment method. With 
a fixed valuation as a basis which varies com- 
paratively little from year to year, it seems per- 
fectly natural and easiest to apportion the amount 
that it is desired to raise, among the different 
pieces or units. 

Sec 4. The older forms of the land tax often in- 
cluded the building tax, with which it was closely 
The building connected in character. At present, 
mgma y ^ g contribution generally forms an in- 

part of the ° J 

land tax. dependent tax on the revenue from the 

site and the building. It is, like the land tax, a tax 
on a fixed source of income. Its incidence will receive 
special attention elsewhere. 

The buildings taxed may be classified according to 
value, or according to the uses to which they are put, 
Forms of the or according to their location, whether 
building tax. urban or rural. There are two very dif- 
ferent forms of the building tax : one is intended to 
fall on the income derived by the owner from the 
building ; the other simply taxes the occupier ac- 



chap. VIII PROPERTY TAXES 223 

cording to the rent, taken as the index of a certain 
amount of tax faculty on his part. The second is 
very much like a consumption tax. The first re- 
gards the revenue derived as a source from which 
the tax may be paid. But even this first form, when 
paid by an owner who is also an occupier, is very 
much like a consumption tax. 

The building tax, wherever in use, is one of a 
number of other similar taxes ; it never stands 
alone. In ease of assessment it has many 

. Assessment. 

advantages. lhe valuation is simple 
and inexpensive. Alterations affecting the base can 
be easily and accurately ascertained. Unlike the 
land tax the building tax is regularly assessed each 
year. Hence this tax is more often proportioned 
than apportioned. The building tax may be ex- 
tended into a sort of industry tax, as when it is 
assessed with higher rates upon buildings used for 
industrial or commercial purposes. An example of 
this method of assessing the business tax is that 
of France cited above. 

Sec. 5. The taxes we have already considered 
cover most fixed capital. Circulating capital also, 
in all of its many forms, has been sub- Taxation of 
jected to separate taxes. This is as true ca P ital - 
of those countries which have the general property 
tax as of those which attempt to accomplish the 
desired results by the taxation of the various ele- 
ments of revenue. How to reach this kind of reve- 
nue and to make the faculty which it represents 



224 INTRODUCTION TO PUBLIC FINANCE part ii 

bear its share of the public burden, is one of the 
most difficult practical problems of taxation. The 
chief difficulties arise from the elusive nature of 
circulating capital and the intimate way in which 
it is connected with many of the processes of indus- 
trial life. Justice and equality demand its taxation. 
But various pleas of expediency are against it. 
Capital is hard to reach, and if it is not fairly 
taxed the result may be injurious to trade. There 
are two forms in which this tax has been applied 
with some effectiveness. One is that of a tax on 
mortgages, the other that of a tax or taxes on 
corporations and banks. Some results have also 
been attained by the attempt to tax stocks and 
Taxation of bonds. Public stocks are especially easy 
public bonds. f assessment. But there is an objec- 
tion to taxing them when the other forms of in- 
vestment escape, because of the bad effect on public 
credit. If it is distinctly declared beforehand that 
the bonds are to be taxed, their selling price is 
lowered. If it is not so declared, at the time of 
issue, and the tax is subsequently assessed, the 
process is regarded by the holders as equivalent 
to a partial repudiation of the debt, and sub- 
sequent loans are looked upon askance. When, 
however, all forms of revenue-yielding capital are, 
nominally at least, subject to taxation, this objec- 
tion to taxing public securities disappears. If 
the tax is not to have the effect of reducing the 
capital value of the stock, bond, or other secu- 



chap, viii PROPERTY TAXES 225 

rity, it must fall upon every form of capital. 
But so great are the difficulties of making it 
thus universal that, as a general rule, such a tax 
affects the rate of interest on all new investments 
in the taxed form. This question will receive 
further attention under the head of incidence. 

Where there is a complete system of public rec- 
ords for deeds, mortgages, and contracts, necessary 
to their validity, it is comparatively Taxation of 
easy to tax these recorded securities. m °rtgages. 
Thus it is that mortgages are generally easily tax- 
able. This, however, results in inequality if the 
tax is not extended beyond the recorded contracts. 
When the mortgage is upon property already taxed, 
as, for example, by the building tax or a general 
property tax, the question arises whether both the 
borrower and the lender should be taxed, or only 
one, and if so which one. An able writer says on 
this point, " Tax the mortgagee on the amount of 
the mortgage, and the mortgagor on the value of the 
property minus the mortgage. That is the only 
rational system." 1 Indeed, it would be, if every 
other form of capital were taxed; but when that is 
not the case, the result is in every respect the same 
as though the owner were taxed alone. Generally 
he pays more. 

Taxation at the source has been warmly recom- 
mended for reaching interest on capital ; i.e. to have 
the debtor advance the tax and shift it if he can 

1 Political Science Quarterly, V., 35. 



226 INTRODUCTION TO PUBLIC FINANCE part ii 

to the lender or share it with him. In the case of 
corporations, this method is applied to the dividends. 
stoppage at As Bastable has well shown, 1 such a 
the source. t ax j s a combined tax on interest and 
on profits, and is therefore partly outside our present 
Taxation of purpose. The taxation of corporations 
corporations. j s no ^ always the taxation of circulat- 
ing capital merely. Corporations often own other 
taxable property, — land, buildings, etc. But in the 
United States, one of the main objects of the intro- 
duction of taxes on corporations was to reach forms 
of personal property that generally escaped. The 
other object was, of course, to extend the general 
property tax to cover all property. We find that 
the basis of the corporation tax is, in many instances, 
the capital stock at its par value, or at its market 
value ; and in a good many instances, the bonded 
indebtedness is also included. When the nature 
of the business is such that the capital stock and 
bonds do not represent all the capital concentrated in 
the hands of the corporation, as, for example, in the 
case of banks and insurance companies, then the 
business transacted, the gross earnings, the divi- 
dends, or the net earnings become the basis. But 
no clear line is drawn between the taxation of in- 
terest and profits, so that corporation taxes often 
approach, in character and operation, business taxes. 2 

i P. 422. 

2 The best discussion of this interesting field of taxation is con- 
tained in Chapters VI., VII., and VIII. of Seligman's Essays on 
Taxation. 



chap, vni PROPERTY TAXES 227 

Sec. 6. There remains but one other very im- 
portant property tax and that is the inheritance tax, 
or the successions tax, sometimes called _ . . ._,. 

Origin of the 

death duties. 1 The feudal "relief" and inheritance 
" heriot " were payments made from the 
estate of a dead vassal, or by his heirs, in recog- 
nition of the lord's authority. Similar payments 
were made upon the transfer of property. But the 
direct connection between these feudal dues and the 
modern inheritance taxes is hard to trace. It is 
probable that the older dues suggested the feasibil- 
ity of the modern inheritance tax. But no closer 
connection than that has been established. The 
modern inheritance tax is a special exercise of the 
taxing power. It is resorted to on account of the 
comparative ease with which large returns can be 
obtained at relatively little expense and without 
great friction. It is generally justified in one of 
two ways : (1) It is claimed that the T t .„ .. 

J v ■' Justification 

deceased person has probably not paid of the inheri- 
his share of the general taxes during his 
lifetime, and that the publicity necessarily connected 
with the transfer of his property to his heirs affords 
an excellent opportunity for the fiscus to " get even " 
with him. If this were the sole justification, it 
would require that the exact history of every estate 
should be investigated, and only those subjected to 

1 See Max West, "The Inheritance Tax," Columbia College 
Studies, IV., 2; also the excellent chapters in Bastable, 2d ed., 
and Seligman, Essays, pp. 307 ff. 



228 INTRODUCTION TO PUBIIC FINANCE part n 

the tax that could be shown to have escaped taxa- 
tion. But this would be a laborious and costly 
process. Another justification is, therefore, sought. 
(2) It is claimed that in all cases of collateral in- 
heritance, the newly acquired wealth comes to the 
heir as a fortuitous, more or less unexpected gain. 
He had been living without it, and this sudden 
increment of wealth represents, temporarily at least, 
a sudden increase in his ability to pay taxes. This 
justification points to the necessity of exempting 
the inheritance by immediate dependents of the de- 
ceased. They were already living upon that prop- 
erty; and the death and breaking up of the family 
and of the estate represent to them not an increased, 
but a decreased, tax faculty. 

An examination of the many forms of inheritance 
taxes reveals two main tendencies. The first is to 
_, . exempt small estates and to establish a 

Tendencies of r 

modern inker- progressive rate for larger ones. The 
( ' second is to exempt that portion of the 

estate passing to the immediate heirs. The grounds 
for this second exemption have already been exam- 
ined. The grounds for the first are wrapped up in 
the general principles of a proportional or progres- 
sive rate. A very good example of these principles 
is afforded by the new English death duties of 1894, 
and the older " Legacy and Succession Duties " of 
1881, which, however, are not progressive as to 
amount of property. Under the new law the estate 
of every person dying after the 1st of August, 1894, 



CHAP. VIII 



PROPERTY TAXES 



229 



must pay a duty which varies according to the fol- 
lowing schedule : 





£ 


£ 


£ s 


Estates from 100 to 


500 pay 1 per hundred 




500 " 


1,000 < 


'20 




1,000 " 


10,000 < 


'30 




10,000 " 


25,000 < 


'40 




25,000 " 


50,000 ' 


'4 10 




50,000 " 


75,000 < 


'50 




75,000 " 


100,000 ' 


' 5 10 




' 100,000 " 


150,000 ' 


'60 




150,000 " 


250,000 ' 


' 6 10 




250,000 " 


500,000 < 


'70 




500,000 " 


1,000,000 ' 


' 7 10 




1,000,000 




8 " 



The older legacy and succession duties are also pro- 
gressive, but in a different way, rising as the degree 
of relationship of the recipient of the legacy becomes 
more and more remote from the deceased, from =£1 
in a hundred to <£10 in a hundred. Thus the total 
burden that may fall upon the share of any one 
person can amount to 18 per cent ; i.e. £10 in 
,£100 of the duties of 1881, and £8 in £100 of 
those of 1894. 

In the United States, inheritance taxes are now 
in use in thirteen commonwealths. In all but one 
of these, New York, direct inheritance A 

' American 

is untaxed, and there only personal prop- inheritance 
erty so inherited is taxed. The list of 
exempted relatives varies somewhat from common- 
wealth to commonwealth. The taxes are not pro- 



230 INTRODUCTION TO PUBLIC FINANCE part ii 

gressive. In all but Tennessee a certain portion of 
the estate is exempt. Probate fees and taxes are 
very common, existing in most of the States. They 
are, however, not in proportion to property except 
in Pennsylvania, Vermont, and Virginia. 



chap, ix PERSONAL TAXES 231 



CHAPTER IX 

PERSONAL TAXES 

Section 1. The simplest form of personal taxa- 
tion is the collection of an equal contribution from 
each citizen. But such a tax cannot be 

. The poll tax. 

large, else it would impose a burden be- 
yond the ability of the poor. A poll tax by itself 
cannot yield sufficient revenue to support the gov- 
ernment. The uniform per capita tax is not just 
unless all wealth is equally distributed, and only 
in a very primitive community is such equality 
found. Hence it is that, outside of the United 
States, the poll tax now arouses nothing more than 
an historic interest. In the United States there are 
about thirty commonwealths that still have the poll 
tax. It is levied on all males between the ages of 
20 or 21 years and 45 or 60. It is very laxly and 
poorly collected in almost all cases, being in general 
successfully evaded by all who have no other tax to 
pay. In four cases it takes the form of a fee for the 
registration of voters. In the early taxes of the 
commonwealths of the United States there was fre- 
quently an assessment of each person at so much per 
poll as a part of the general property tax. In some 
commonwealths the poll tax still exists in this form. 



232 INTRODUCTION TO PUBLIC FINANCE part n 

In a few cases this contribution is used for local pur- 
poses ; thus, in some commonwealths there is a road 
tax of so much per capita assessed upon those indi- 
viduals who are found by the authorities on the 
road. The road tax is generally payable either in 
labour or in money. 

The returns from the poll tax are generally insig- 
nificant. Despite the apparent ease of assessment the 
poll tax is expensive to collect. It frequently causes 
much opposition and friction. It militates against 
the demands of equality, and has been superseded 
by other forms of personal taxation, which recog- 
nise differences in faculty. 

Sec. 2. We have already seen how the poll tax in 
one instance developed into the income tax. That 
_, ... , tax will now be studied more closely. 

The theory of J 

the income While it is true that, since the abolition 
of the federal tax, the income tax has 
little more than a theoretical interest for American 
readers, yet inasmuch as the hopes of reformers all 
centre in it, and inasmuch as it may any day, 
again, become a live question, it is well to give the 
theory of the tax some consideration here. While 
the general, or special, property taxes rest either 
on the benefit theory or on the faculty theory of 
taxation, income taxes are better defended from the 
standpoint of the faculty theory. It is easier to 
make it clear that income measures faculty, than 
it is to show how income can measure benefit. To 
be sure, it has been claimed with some plausibility 



chap, ix PERSONAL TAXES 233 

that income is a sure indication of the benefit en- 
joyed under the government. But that proposition 
requires more argument and explanation than does 
the simple statement that a citizen is able to pay 
more or less because he has a greater or a smaller 
income. 

Besides this advantage of easier justification, the 
income tax has in common with all personal taxes 
another recommendation. It levies directly on the 
tax-payer. The nation's income from taxation is 
derivative. As such it is abstracted from the an- 
nual increment of wealth of the citizens. Any taxa- 
tion which is actually paid out of capital or property 
is ruinous. Property taxes as we have seen are, 
theoretically, paid from the revenue 'earned by the 
property or out of other income of the owner, the 
property being at best but the indication of faculty 
or of benefit. But the income tax finds the indica- 
tion of faculty in the source of the tax. There is a 
certain directness about this identification of base 
and source which theoretically, at least, is a strong 
recommendation of this form of tax. 

From the standpoint of the faculty theory no 
general property tax, and no system of special prop- 
erty taxes which has not, incorporated in it, a tax on 
wages, salaries, profits, and the like, can be called 
equal. Many persons enjoying comparatively little 
property live in luxury and ease from their personal 
gains, while many others possessing comparatively 
large property may be from time to time in serious 



234 INTRODUCTION TO PUBLIC FINANCE part it 

straits. For example, to be "land poor" is to be 
poor indeed. Large property does not always imply 
ability to pay taxes, and the absence of property 
does not always imply absence of ability. 

There has been a feeling in the United States, not 
always clearly expressed, yet strong enough to influ- 
ence legislation, that the earnings of personal exer- 
tion, professional fees, and the like are not good 
subjects for taxation. This is the result of an exr 
treme laissez-faire view, which decries every sort 
of interference with individual freedom. Every tax 
is seen or felt to have a repressive tendency, which 
is sometimes supposed to be one of the main objects 
in assessing taxes. 1 It is feared, then, that to tax the 
earnings of men would discourage exertion, would 
discourage industry. That this is a mistaken view 
of the nature of taxation, will, in the light of our 
whole discussion, be evident from the mere state- 
ment. A general tax on all income would not 
discourage income getting, but might even act as a 
stimulus thereto, more income being required to 
meet the tax and the same expenses as before. It 
may be true that this form of income represents less 
faculty than income from property, because more 
precarious than the latter, which furthermore leaves 
the owner free to engage in the getting of other in- 

1 A liquor license in a certain western town cost $100. A tax 
of $100 was put upon banks. The bankers held up their hands in 
horror : ' ' The people think the banks are as undesirable as the 
saloons ! " 



chap, ix PERSONAL TAXES 235 

come. But the entire exemption of personal earn- 
ings cannot be justified. 

Sec. 3. The form of the income tax will be deter- 
mined by the place given it in the system of taxa- 
tion. If it were possible to administer „ 7 

r The place of 

a single tax of any sort in accord with the tax in the 
the demands of justice, the income tax sys em ' 
would be, theoretically, the one to be chosen. But 
the objections to any single tax, already stated, bear 
upon this as well as upon any other. Theoretically, 
it is best to make the income tax the central one of the 
system, the gaps of which are filled in by other taxes. 
Ii this be the intention, then the income tax can be 
arranged in the form in which it is most easy to 
administer. Thus the very small incomes can be 
exempt from the income tax, being covered by direct 
and indirect consumption taxes. In this way one 
source of difficulty and friction is avoided. Then 
no distinction need be made in the assessment of 
income from different sources. For if it be decided 
to tax income from funded investments at a higher 
rate than other forms of income, this additional tax 
can be laid on in the form of a property tax. How 
far the exemption of smaller incomes should go, or 
to what extent funded incomes should be more 
heavily burdened, depends upon the concrete facts 
in each case. An abatement of the burden in cases 
where there are already more than the usual claims 
on the income, as of a large family, is, also, some- 
times given. 



236 INTRODUCTION TO PUBLIC FINANCE part 11 

Sec. 4. As an example of such a tax, not, per- 
haps, ideally perfect, but still laid down in accord 
Prussian in- with the general principles enunciated 
come tax. above, we will study somewhat in detail 

the Prussian income tax. 1 In order to have in mind 
the main features of the development already out- 
lined above, Chapter IV., we quote from Mr. Hill 
the successive stages in the growth of personal taxa- 
tion in Prussia : 

" 1. A uniform poll tax, 1811. 

" 2. A class tax, collecting somewhat more from 
the prosperous, and not less from the poor, 1820- 
1821. 

" 3. To supplement the class tax, an income tax 
with comparatively few classes, a uniform rate, and 
a maximum limit, 1851. 

" 4. Classification made finer, the maximum limit 
removed, and the class tax below made practically 
an income tax with a progressive rate, and the 
exemption of incomes up to 420 M., 1873. 

"5. Exemption of incomes up to 900 M., reduc- 
tion of the remaining rates of the class tax, and of 
the two lowest rates of the income tax, 1881-1883. 

" 6. Principle of progression extended to all 
incomes under 100,000 M., incomes under 10,000 M. 
taxed less than before, and higher incomes more ; a 

1 For history see Hill, Quarterly Journal of Economics, VI., 207 ; 
Wagner, " Die Reform der directen Staatsbesteuerung in Preussen 
im Jahre 1891," Schanz' Finanz Archiv., VIII. Jahrgang, II. Band. 
A full statement of the law is there appended. 



CHAP. IX 



PERSONAL TAXES 



237 



declaration of income by the tax-payer required, 
and a finer classification adopted, 1891." 

To make the new tax still more clear we quote 
the rates from the law itself : 



TARIFF OF RATES. 



from 


Incomes. 

tc 


i (inclusive' 


» 


Eate. 




M. 




M. 




M. 




900 




1,050 




6 




1,050 




1,200 




9 




1,200 




1,350 




12 




1,350 




1,500 




16 




1,500 




1,650 




21 




1,650 




1,800 




26 




1,800 




2,100 




31 




2,100 




2,400 




36 




2,400 




2,700 




44 




2,700 




3,000 




52 




3,000 




3,300 




60 




3,300 




3,600 




70 




3,600 




3,900 




80 




3,900 




4,200 




92 




4,200 




4,500 




104 




4,500 




5,000 




118 




5,000 




5,500 




132 




5,500 




6,000 




146 




6,000 




6,500 




160 




6,500 




7,000 




176 




7,000 




7,500 




192 




7,500 




8,000 




212 




8,000 




8,500 




232 




8,500 




9,000 




252 




9,000 




9,500 




276 




9,500 




10,500 




300 




The rate increases 










from 


to 


in stages ol 


> 


by 


M. 


M. 




M. 




M. 


10,500 


30,500 


1,000 




30 


30,500 


32,000 


1,500 




60 


32,000 


78,00C 


> 


2,000 




80 


78,000 


100,00( 


) 


2,000 




100 



238 INTRODUCTION TO PUBIIC FINANCE part it 

In the case of incomes from 100,000 M. to 105,000 M. 
the tax is 4000 M. And from that point on the pro- 
portional rate of 4 per cent is assessed upon the lower 
limits of stages of 5000 M. each. 

This rate is progressive from about two thirds of 
one per cent at 900 M. to 3 per cent at 10,000 M. 
Then the rate is nearly proportional at 3 per cent 
up to 30,000 M. Then progressive again, until 
at 100,000 M. 4 per cent is reached, after which it 
is proportional again. Each tax-payer having an 
income of over 3000 M. is required to " declare " it. 
He has to fill out a blank calling for a statement 
of income from each of four sources : (1) from 
capital invested, interest and dividends ; (2) from 
landed property and houses, including all crops, 
„, , , whether consumed in the house or not, 

The form of 

the declara- but deducting the cost of cultivation ; 
(3) from trade, industry, or mining, de- 
ducting the cost of maintenance ; (4) from any em- 
ployment, wages, salaries, fees, and including pen- 
sions and every source of income not covered by (1) 
(2) and (3). Deductions are allowed (1) for interest 
on debts, except that on business debts ; (2) for 
permanent legal burdens (example, maintenance of 
reserves), (3) contributions to sick funds ; (4) life- 
insurance premiums. This division of the income 
into different parts is for the sake of accuracy of 
declaration, not for the sake of assessing different 
rates on the different kinds of income. 

Persons with large dependent families or labour- 



Chap, ix PERSONAL TAXES 239 

ing under any special economic conditions seriously 
affecting their faculty are allowed an Abatements 
abatement of not more than three grades allow ^- 
provided their incomes are not over 9500 M. Persons 
having less than 3000 M. deduct 50 M. for each child 
under fourteen years of age, and if there are three 
such children a reduction of one grade is made. 

Corporations and stock companies pay the income 
tax on all dividends over 3J per cent. This makes 
double taxation of this income, which is regarded 
as particularly " capable." In other ways the 
attempt is made to tax funded income more 
heavily. The exemption of incomes below 900 M. 
($225) and the lower rate for smaller incomes is 
justified on the ground that the consumption taxes 
already impose a burden on these persons. 

The assessment of the tax is not perfect. It is 
said to be considerably better, however, than the 
assessment of property in America. Large incomes 
escape in part. It has, however, an advantage in 
that the evasion of the tax does not in Prussia as it 
does in America intensify existing differences and 
inequalities. Other parts of the system tend to 
offset the failure in this case. 

Sec. 5. The British income tax, correctly called 
"the property and income tax," may The property 
serve as another illustration, but it dif- °: n } nc ° nie 

tax in Eng- 

fers very much from the Prussian. Log- land. 
ically, this tax might have been treated in the pre- 
vious chapter, but it is as well to discuss it here. 



240 INTRODUCTION TO PUBLIC FINANCE part n 

In the first place, as has already been stated, it is 
rather a system of taxes on revenue than a tax on 
the aggregate income of each person. It is a sys- 
tem of modified property taxes, with a wage and 
salary tax appended. In Prussia the intention is 
to make the total income the base irrespective of 
the source, and reference to the sources is called 
for in the declaration merely as a means of getting 
at the total with greater accuracy. In England the 
different sources are kept strictly apart, and there is 
a difference made in the treatment of each kind of 
income : the tax being in some cases " stopped at 
the source." The total income is only called into 
use in estimating the exemptions and abatements. 
The tax-payer has the right by summing up his 
whole income to show that he has been taxed too 
much, or is entitled to exemption. In that case he 
is reimbursed. In 1895 such abatements amounted 
under schedule A (see below) to £ 800,000 ; on small 
incomes the amount returned was £ 840,000. So 
separate are the different parts of this tax that Mr. 
Wilson says of it i 1 " To the bulk of the people, 
it is known in its most obnoxious (?) form as a tax 
upon ordinary incomes, salaries, professional earn- 
ings, profits of trading, etc." Bastable (p. 449) 
says : " Inequalities are, however, removed by the 
comprehensiveness of the tax." 

The various revenues are taxed in five "schedules," 
known as schedules A to E. 

1 P. 115, National Budget. 



chap, ix PERSONAL TAXES 241 

Under schedule A, Great Britain taxes the rev- 
enues received from property by owners of rented 
lands or houses (tenements), proceeds from tithes 
(not commuted), royalties, etc. Mortgages are 
taxed in this schedule, owners being allowed to 
deduct what they advance in taxes from the inter- 
est they pay. By a change recently made in the 
income tax, in consideration of the burden of the 
inheritance tax, revenue assessed in schedule A 
may receive an abatement of one-eighth in the case 
of that from farms, and one-sixth in the case of 
that from buildings. 

Under schedule B is taxed the income gained by 
occupiers of land (tenements and herediments) ex- 
cept where the land is used as the means of carry- 
ing on some trade ; as, for example, nursery gardens. 
Owners in occupation pay under this head. 

Under Schedule C is taxed the income from annu- 
ities, dividends, etc., not paid from the public funds. 
The banks are required to deduct the amount of the 
tax from the interest paid. 

Under schedule D are taxed salaries, professional 
earnings, profits of trading, etc. (railways, canals, 
mines, gas-works, water- works, etc.), and all gains 
not included in the other schedules. Most wage- 
earners evade the tax, or are exempt on account 
of the smallness of their incomes. 

Schedule E includes public salaries and pensions 
of employees of the State, or of the corporate bodies. 
This tax is stopped at the source. 



242 INTRODUCTION TO PUBLIC FINANCE part ii 

Incomes of less than ,£400 are assessed at £150 
less than they really are. Between £400 and £500 
at £100 less. These abatements exempt all persons 
with less than $750 annual income and lessen the 
burden for all up to $2500. It is, therefore, a tax 
on large incomes. 

This tax is the variable element in the English 
system, the rate being changed from time to time 
Itsplaceinthe according to the estimated requirements. 
system. xhe indirect taxes, the excise and the 

customs duties, being necessarily of fixed rate, yield a 
steady return, which grows slowly. And any varia- 
tion in the probable expenditure can be met by chang- 
ing the rate of the income tax. The annual yield 
is now about £15,000,000, or about one-sixth of the 
total revenue of the government. A rather large 
change in the rate of this tax, would, therefore, not 
result in a very great change in the total income. 

The assessment of wages, business profits, and the 
like, is said to be very lax. But this is tolerable 
because the indirect taxes, which, together, are more 
than one-half the public income, may be said to fall 
on that. Life-insurance premiums may be deducted 
from the taxable income. 

Sec. 6. The United States Federal government 

has made two attempts to establish an income tax. 

r . The first was a war measure, and was re- 

income taxes 

in the United pealed as soon as the pressing necessity 

was removed. The second was, like the 

English income tax in 1842, a means to make up the 



chap, ix PERSONAL TAXES 213 

estimated deficit resulting from the repeal of the pro- 
tective duties. It failed to go into effect, however, 
as the Supreme Court could not be convinced of its 
constitutionality. 

We shall consider the civil war tax first. 1 The 
constitution provides : 

" No Capitation, or other direct, Tax shall be laid, 
unless in Proportion to the Census or Enumeration 
hereinbefore directed to be taken." Article I., sec. 9. 

Also, " Representatives and direct Taxes shall be 
apportioned among the several States which may be 
included within this Union, according to their re- 
spective Numbers, which shall be determined by 
adding to the whole Number of free Persons, includ- 
ing those bound to Service for a Term of Years, and 
excluding Indians not taxed, three-fifths of all other 
Persons." Article I., sec. 2. 

And, " . . .all Duties, Imposts, and Excises shall 
be uniform throughout the United States." Article 
I., sec. 8. 

Early in the search for revenues to support the war 
a proposition was made for the apportionment of a 
tax of f30,000,000 in accordance with these pro- 
visions. But it was felt that population ^ he civii war 
was no measure of the wealth of the dif- income tax. 
ferent States, and that such an apportionment in 1861 
would not result, as one in 1789 might have done, in 
imposing fairly equal burdens upon all the citizens. 
In lieu thereof, an income tax of 3 per cent on all 
1 See Quarterly Journal of Economics, VIII., 4; also July, 1889. 



244 INTRODUCTION TO PUBLIC FINANCE part n 

incomes with an exemption of $800 was voted. In 
the case of Springer v. the United States, 102 U. S. 
508, the Supreme Court decided that such a tax 
could be levied since it was not a direct tax within 
the meaning of the constitution. 

The tax was to go into force a year later. But in 
1862 it was amended, making the deduction $600 
and the rate progressive. Incomes from $600-$10,000 
(less $600) paid 3 per cent, all over that 5 per cent. 
In that form it went into effect. The great war tax 
law by which the whole system was raised to its 
point of highest productivity was that of June 30, 
1864. In this act the rate for incomes over $10,000 
was set at 10 per cent, and for incomes from $5,000- 
$10,000 at 7J per cent. But again, before the law 
went into effect the 7J per cent rate was cut out and 
10 per cent was collected from all incomes over 
$5000. On all incomes derivable from the public 
funds the tax was stopped at the source. In 1867 
the tax was reduced and the rate made 5 per cent 
with an exemption of $1000, and it remained thus 
until 1870. The income tax was, in a way, con- 
joined with one on corporations, banks, insurance 
companies, railroads, etc. The part of the indi- 
vidual's income taxed in this latter way was deducted 
before the income was assessed. No attempt, how- 
ever, was made to make the rate of this tax progres- 
sive. It was first 3 per cent and later 5 per cent, and 
there were no exemptions. The assessment was made 
on the basis of a written declaration by the tax-payer, 



chap, ix PERSONAL TAXES 245 

subject to correction by such information as the 
assessor could gather. Generally the information 
upon which the tax was assessed was published in 
the newspapers. With the general removal of war 
taxes in 1870 the income tax fell away. The pro- 
tective policy, which demanded the retention of the 
customs duties, rendered it possible to do without 
the revenue from this source. 

The reduction of the customs duties in 1894, and 
the probability of a falling off in the revenues from 
this source led to the second income tax. 1 ^ lie i ncome 
The law for this tax, faultily drawn and taxo/1894. 
more or less incorrect in principle, was declared un- 
constitutional by the Supreme Court in 1895 before 
it went into effect. The grounds for this decision, 
which reversed that in the case of Springer v. the 
United States, by which the other tax law had been 
tested, were that the tax was a direct tax and also 
not uniform inasmuch as all incomes below $4000 
were exempt. This astonishing decision bespeaks 
more acquaintance on the part of the Court with 
economic literature than with the use of language at 
the time of the adoption of the constitution. As the 
decision now stands no income tax can be levied by 
the federal government without a constitutional 
amendment. 

This income tax was to be for five years, commenc- 
ing 1895. It was digressive, at 2 per cent, on all 
incomes in excess of $4000. It was levied upon 
1 Quarterly Journal of Economics, IX., 1. 



246 INTRODUCTION TO PUBIIC FINANCE part n 

" the gains, profits, and income " of all citizens and 
residents, " derived from any kind of property, rents, 
interest, dividends, or salaries, or from any profes- 
sion, trade, employment, or vocation," " or from any 
other source whatever." Debts, and interest thereon, 
were exempt. The cost of stocking the farm and 
home consumption of products were not included. 
Accretions by gift or inheritance were to be counted 
as income. All persons having an income of over 
$3500 were required to declare their incomes. The 
individual stockholder in a corporation was allowed 
to deduct the income from his shares in making his 
return. Public corporations were exempt, but other 
corporations were not. State and local taxes except 
special assessments might be deducted. United 
States officials were taxed on their salaries. Returns 
were to be confidential. 

It will easily be seen that this was a combina- 
tion of an income tax with an inheritance and 
corporation tax. That it would necessarily have 
worked badly on that account is not clear. The 
rate was so low and the exemptions so liberal that 
pretty full returns might have been justly antici- 
pated. The law, however, was loosely drawn, faulty 
in wording, and even contained clauses taken from 
the laws of the civil war tax having no possible 
meaning or bearing in the connection in which they 
were used. No attempt was made to adjust the tax 
to the existing burden of State and local taxes. 

The taxation of income by the commonwealths of 



CHAP. IX 



PERSONAL TAXES 247 



the United States is rare and entirely without lead- 
ing principles. In Virginia alone there is a general 
income tax. It is supposed to be a tax of 10 per 
cent on all incomes over $1000. But the returns 
obtained in this commonwealth are insignificant be- 
cause of the lax assessment. Partial income taxes, in- 
tended to supplement the personal property taxes and 
to cover the annual saving, exist in Massachusetts, 
Pennsylvania, Tennessee, and North Carolina. 1 

1 See Seligman, "Finance Statistics," Publications of The 
American Statistical Association, New Series, 8, December, 1889. 



-248 INTRODUCTION TO PUBLIC FINANCE part n 



CHAPTER X 

THE INCIDENCE OF TAXATION 

Section 1. We postponed a treatment of the 
question of incidence in connection with each tax, 
T . , , because the incidence of any tax depends 

Incidence de- J r 

pends upon upon its place in the system. It seems, 
isyser therefore, better to treat the subject by 
itself in such a way that every tax can be considered 
in its connection with other taxes. The problems 
of this part of the subject are many and difficult. 
In an elementary treatise, all that can be done is to 
suggest methods of study and a very few of the 
more simple principles. 

By the term " shifting " is meant the transference 
of the burden of a tax from the payer to some 
The meaning other person or persons. By the " final 
of s if mg^ incidence " is meant the falling of the 

and of inci- & 

dence. burden, without possibility of further 

shifting, upon some particular revenue, property, 
expenditure, or person. This may be illustrated by 
two very simple cases. An American bookseller in a 
college town imported some books from England for 
the use of the students. He paid the duty to the 
custom house, but collected it again from the stu- 
dents in the shape of an addition to the price of the 



chap, x INCIDENCE OF TAX A TION 249 

books. The bookseller shifted the tax. The final 
incidence was on the students. In this case, the shift- 
ing was expected by the law-maker. It was to save 
the expense of hunting up and taxing each user of 
the books in question, that the seller was made to 
pay the tax, or to be the agent of the government in 
collecting it. Since the students thus taxed cannot 
shift the burden, we need not investigate this case 
further. Again : in California, the commonwealth 
and local taxes paid by the mortgagee amount on 
the average to about If per cent. The current 
rate of interest on the best untaxed loans, in 
and around San Francisco, is about 6 per cent, 
but on mortgages, in spite of the good security, 
it has been almost invariably 8 per cent, or 
more. In this case, the mortgagee shifts the 
tax, and its incidence is on the mortgagor. This 
may be its final incidence, or it may be possible for 
the mortgagor to shift the burden to the tenant of 
the mortgaged property in the shape of higher rents, 
or to the purchasers of the commodities raised on 
the property in higher prices. This last illustration 
shows how complicated the problem of incidence 
may be. 

Sec. 2. Each and every tax must be studied in 
its proper connection if it is desired to know to 
what extent the aims of taxation are Shifting may 
realised. Sometimes the shifting of the °r™y™tde- 

° feat the pur- 

tax defeats the general purpose, as in pose of the tax. 
the case of the tax on the mortgagee's interest in 



250 INTRODUCTION TO PUBLIC FINANCE part n 

California, while in others the general purpose can 
only be accomplished when the tax is shifted. The 
process of shifting, like every other economic trans- 
fer of burdens, costs something. No person ad- 
vances the amount of the tax with the intention of 
transferring it to some other without desiring to be 
paid for his trouble and risk. Unless the conditions 
are against him he will succeed in getting paid for 
it. Thus, the importer of books tries to get a 
certain profit on the cost to him, which is composed 
of the price in England plus the cost of transporta- 
tion and the duty. If the rate of profit or commis- 
sion which he reckons is 10 per cent, he adds 10 
per cent of the duty as well as of the other 
items. The money which he has advanced on the 
duty must bring him its share of the earnings. So 
in the case of the mortgages in California. One- 
quarter of one per cent interest, or more, is usually 
charged above the rate plus the tax. If the lender 
has to suffer the annoyance and run the risk of 
paying the tax, he will have to be reimbursed. 
Shifting is a Shifting is, therefore, an undesirable and 
costly process. cos tly process, and is to be avoided un- 
less there is some clear saving, as in the case of 
the customs duties. 

Sec. 3. The aims of taxation, the accomplishment 

of which shifting may aid or defeat, have been stated 

in the form of canons. The oldest and most famous 

are the four of Adam Smith. 1 The fourth of these 

1 Wealth of Nations, Bk. V., Chapter II., Part II. 



chap, x INCIDENCE OF TAX A TION 251 

famous canons bears directly upon the problem in 
hand. Shifting adds to the burden without adding 
to the revenue coining into the treas- Sometimes a 
ury. Sometimes, however, by assessing s ^ e c J l 

J ' J ° more produc- 

tive tax upon a part of a great economic five. 

process and permitting of a certain shifting, the tax 
is made more productive to the treasury. Now it 
is clear that the first duty of the fiscal officer is to 
fill the treasury as quickly and easily as possible. 
He has, therefore, no right to pass over a tax that 
is productive, in favour of one that is not, simply 
because the one is shifted and the other is not. If, 
however, it can be seen that the incidence is such as 
to entirely derange the system adopted and defeat 
the general aims, an attempt must be made to pre- 
vent it. If a tax can be found that is productive 
and at the same time is not shifted, it will be pre- 
ferred to one that is shifted. 

It follows directly from the fact that a tax should 
be as " productive" as possible, that those taxes 
chosen should have as little repressive effect as 
possible. 1 For, to destroy the phenomenon is to 
lose the return. 

Sec. 4. Let us suppose that the ideal by which 
all systems are to be tested is that the total taxation 
shall impose a slightly progressive burden upon all 

1 See Bastable, pp. 388, 389, for the same idea ; also Ross, "A 
new Canon of Taxation," Political Science Quarterly, VII. This 
is no very new canon. Adam Smith said : " Taxation should re- 
tard as little as possible the growth of wealth." 



252 INTRODUCTION TO PUBIIC FINANCE part ii 

incomes. Then it is necessary to examine all the 
taxes with their various shiftings and to see how 
the total shifting affects the final result. 1 It is a 
fundamental principle, too often overlooked in the 
discussion of incidence, and one that cannot be too 
frequently restated, that the possibility of shifting 
Shifting can- depends largely upon the relation of the 
no .a -e pace ^ ax ^ q Ues ^ on £ \\ 1Q ther parts of the 

ivhen the tax u r 

is universal, system. Let us use an old illustration : 
the tax on mortgages is in California shifted to the 
mortgagor because there are other investments for 
capital that escape taxation. If every possible 
channel into which capital might go led to the pay- 
ment of a similar tax, it would not be so possible 
as it now is to shift this tax. It is not quite true 
that the tax would not be shifted at all, but it cer- 
tainly could not be so universally shifted. We 
shall see later when it may be shifted. If we had 
a tax system so arranged as to fall, in the first in- 
stance, upon all parts of each individual's income, — 
an unattainable ideal, — there could be but little 
shifting. But when a part of the nation's wealth 
is exempt, taxes upon all wealth that might be trans- 
ferred into this exempt form are peculiarly liable 
to be shifted. 

1 There have been many theories which have undertaken to 
explain the final incidence of all taxation on some other plan than 
that of an examination of all the different taxes. Professor Selig- 
man discusses ten different classes of theories in regard to inci- 
dence of which only two require this method. See Shifting and 
Incidence of Taxation. 



chap, x INCIDENCE OE TAX A Tl ON 253 

Sec. 5. We shall now look at the incidence of the 
more important taxes, taking them in the order of 
our previous discussion. Excise taxes and customs 
duties, so far as the latter yield a revenue Shifting of 
and fall upon citizens of the country excise axes 

r J and customs 

laying them, 1 are for our present purpose duties. 
the same. They are classed by Professor Seligman 
as " virtually one form of the profits tax," which, 
" in the great majority of cases," will be " shifted 
in whole or in greater part." What Professor 
Seligman says upon this point 2 is true enough and 
very clear, but we shall follow an entirely different 
analysis. 

In the case of these taxes it is the intention of 
the law-maker that the tax shall be shifted to the 
consumer. If any of it remains on the producer or 
importer, it may be said to have been shifted back. 
This takes place sometimes: (1) if the taxed com- 
modity is produced as a monopoly, and the price is 
already as high as the traffic will bear, i.e. the addi- 
tion of the tax to the price would lessen the sale, 
then a part or the whole of the tax comes out of the 
profits of the monopolist; (2) a new tax on some 
commodity produced by a large plant of fixed capi- 
tal, not easily transferable to other lines, may remain 
on the producer. In all other cases an excise or an 
import tax cannot be shifted from the consumer. 

Sec. 6. The general property tax consists of a 

1 See Chapter VII. for shifting to foreigners. 

2 See pp. 140 ff., and p. 177. 



254 INTRODUCTION TO PUBLIC FINANCE part n 

number of different parts which are best considered 
separately. Such a separation is legitimate since 

The inciden e ^ iG ^ aX ^ a ^ S a P ar ^ ^ n * ne P r &Ctice of 

of the general assessment. It falls naturally into at 

property tax. 1 , , . i • • • , -, 

least two great divisions, a tax on real 
estate and a tax on personal property. The tax on 
real estate may be regarded as of two parts, a tax 
on land and a tax on buildings. In the general 
property tax, the tax on land is assessed according 
to the selling value. When the land is used for 
agricultural purposes the incidence of the tax lies 
between the owner and the user of the commodities 
produced. 1 Can the owner shift the tax to the con- 
sumer ? If this happens, it means a rise in prices 
which again means an extension of the margin of 
cultivation, marginal lands being untaxed, as having 
no price, or less heavily taxed. But such a rise in 
price may affect consumption and lessen the demand 
at the same time that it tempts to the creation of a 
new supply, thus inducing a fall in prices. But as 
cultivators of land do not readily withdraw from their 
position, those on or near the margin of cultivation 
will suffer severely, but will generally hold on until 
their profits are gone, often until they are ruined. 
The conditions under which agricultural products 
are sold to-day are beyond the control of any one 
set of producers. The full burden of the taxes 

1 For America, the tenant may be considered as a consumer of 
utilities, residence, etc. ; so few farms, or productive lands, are 
rented that they need not be considered. 



chap, x INCIDENCE OF TAXA TION 255 

upon agricultural land, therefore, falls upon the 
farmers. In the United States, inasmuch as the 
farmers are seldom the owners of any in the United 
considerable amount of untaxed personal ' a es e 

r farmers are 

property, they bear far more than their overtaxed. 
proportionate share of the commonwealth taxes and 
often also of the local taxes. 

When land is used for other purposes than agri- 
culture, it is generally best considered in connection 
with the buildings on it. The incidence r .^ 

° Incidence of a 

of the general property tax on houses tax on buiid- 
and the land they occupy will vary from mgs ' 
locality to locality with the demand for such houses 
and the supply. Houses cannot be readily torn down 
or fundamentally altered without great loss: conse- 
quently if the supply of rentable houses is larger 
than the demand, the tax on the buildings will fall 
wholly on the owner. It can be shifted to the tenant 
only when the supply of houses is very limited. In 
America these two cases are both frequently illus- 
trated. 

The incidence of that part of the general prop- 
erty tax which is assessed upon personal property 
or upon invested capital is very difficult ™ . . , 

r i- J The incidence 

to trace. If the tax were well and uni- on personal 
versally assessed upon all such capital, proper v ' 
it could not, regularly, be shifted from the owner 
at all. There is no free field for this capital to 
invade. But when the tax is evaded by a con- 
siderable proportion of the capital, then the tax 



256 INTRODUCTION TO PUBLIC FINANCE part n 

can be shifted to the borrower and will be so in 
the main. 1 

It will be seen even from this brief statement of 
the facts of shifting concerning the general property 
tax that the incidence is different from the intended 
incidence wherever that tax fails of forming a com- 
plete system. 

Sec. 7. The incidence of a land tax like the Eng- 
lish differs somewhat from that of the land tax as 
^, . ., part of the general property tax, inas- 

The incidence r ° * r J 

of a special much as it stands entirely apart from the 

land tax. , ox-ii j-i • ±. 

system, btill there are some points in 
common. Both these taxes may be capitalised. 
That is the taxed property will sell for less than 
it would bring untaxed by the amount of the capital 
sum which, if put at interest, would yield the 
amount of the tax. In the case of the general 
property tax, which really falls upon well nigh all 
land of any value whatever, the tax as we have 
seen falls most heavily upon the producer of agri- 
cultural commodities. But the English land tax 
has been capitalised and was paid for all suc- 
ceeding owners by the owner at the time of its 
assessment, since it did not affect all lands and has 
become a fixed charge upon the property. The 
same is generally true of all taxes upon land which 
are in addition to a regular system of taxes a part of 



1 For the rest of this intricate subject the student is referred to 
the larger treatises. 



chaf. x INCIDENCE OF TAXATION 257 

which covers the revenue from land. The same 
may be said of a special building tax. 1 

Special taxes upon certain forms of fixed capital, 
especially when they stand beside a general system 
which is fairly universal, may be capital- r . , 

J j r Incidence of 

ised in the same way. The incidence of special taxes 
taxes on profits is determined by the con- on capx a ' 
trol which the recipient of profits has over the profits. 
If the control is so great that he can virtually raise 
them at will, then he can shift the burden. But, in- 
asmuch as it is generally true, that he is taking all 
that he can whether he be taxed or not, it is clear 
that he cannot as a rule shift them. Generally 
speaking, then, taxes upon profits are not shifted. 
A tax on successions, also, cannot in any conceivable 
way be shifted. 

Poll or capitation taxes cannot be shifted at all. 
The only conceivable case in which they might be 
shifted is when levied upon a wage- Shrt - f 
earner at the point of starvation. The poll taxes and 

. . £ . , -i i , wages taxes. 

same is true 01 a tax on the lowest wages. 
The burden would mean higher wages in order for 
the labourer to live and meet the tax. But when the 
wage-earner is of a higher class, it is to be presumed 
that he cannot shift his tax at all, for that presup- 
poses that he can control his wages sufficiently to 
raise them. If that were the case we may safely 
assume that he would raise them whether the tax 

1 See Seligman, p. 117. 



258 INTRODUCTION TO PUBLIC FINANCE part n 

were imposed or not. He cannot therefore shift 
them at all. 

A tax upon income cannot be shifted if the 
assessment is general and uniform. But as a 
matter of fact no such tax is general or uniform, 
and it will be shifted or not according as it splits 
up into other taxes upon rent, interest, wages, etc. 

In conclusion : the intention of the law-giver as 
to the incidence of taxation will be fully realised 
only, (1) when the system is theoretically perfect, 
and (2) when the execution of the law is perfect. 
The worst cases of shifting arise when serious gaps 
are left in the tax system, or when the administra- 
tion of the system is so lax in parts as to result in 
a crippling of the whole. Shifting always acts to 
intensify existing inequalities. The problems of 
incidence are among the most important of our 
subject. The law-maker may with the best of in- 
tentions work the greatest imaginable injury ; and 
the necessity for a careful study of the probable 
effects of each new tax cannot be over-estimated. 



chap, xi FEES AND INDUSTRIAL EARNINGS 259 



CHAPTER XI 

FEES AND INDUSTRIAL EARNINGS 1 

Section 1. There is the closest sort of connection 
between fees and the industrial and commercial 
earnings of the State. In the case of The connec- 
tive sale of goods or services by a State tion between 

. . fees and in- 

the private persons pay the price of the dustrial earn- 
wealth which they obtain. The price in 9 s - 
is fixed by economic conditions. It cannot exceed 
a certain sum, for if it does the citizen will not buy. 
But in most cases considerations of a public charac- 
ter induce the State to enter upon the industry or 
commercial enterprise, and these very considerations 
are inducements to a lowering of the charges. As 
the public element comes to be more clearly recog- 
nised, a part of the economic forces fail to act. 
The State sacrifices part or all of the gain, but makes 
no loss. As the public element presses still more to 
the front, the State pays, at the general cost, a part 
of the expense, and charges the particular persons 
specially benefited merely a fee for the service. 
Many modern public institutions have gone through 
a process of development from one stage to the other, 
and the different stages are found contemporaneously 

1 For definitions and classification see Chapter II. 



260 INTRODUCTION TO PUBLIC FINANCE part n 

in different countries. But while this is the order of 
progression in new functions, it is not the histori- 
cal order of the rise of these two forms of payment 
for public services. Fees are the older of the two. 

Fees are not to be found in the ancient civilisa- 
tions, because of the intimate relation between the 
Fees and the individual and the State. Only when 

consciousness ,n • j- ">■ . • r 

, ,. , 7 . „ there is a distinct consciousness 01 
of "public 

life. " public " functions can we have fees. 

Payments in the middle ages for the services of the 
courts, of the church, of the schools, etc., were mainly 
of the nature of private remuneration. As soon, 
however, as any function comes to be recognised as 
public in character, fees arise. At first contributions 
are more or less freely and willingly rendered for the 
use of markets, roads, bridges, protection, and the 
like. Frequently there is an arbitrary assumption 
made that a special benefit is conferred and a fee is 
charged. As the State emerges from feudalism, the 
growth of public consciousness is marked by a rapid 
multiplication of these fees, which form a system of 
public revenues without taxes. After that the line 
of development is in the direction of the curtailment 
of the fee system and the growth of the tax system. 
Fees mark the transition stage in the division of 
labour in the public service. There is a growth of 
the conception of common benefits as distinct from 
special private benefits, and a corresponding removal 
of functions from one to the other category. At the 
same time new functions arise which are supported 



chap, xi FEES AND INDUSTRIAL EARNINGS 261 

by fees, until finally the recognition of public in- 
terest outweighs that of the individual interest. 
Some fees, however, become fixed in Fees emerge 
character and are not subject to these int0 taxes - 
transforming tendencies ; but the public interest is 
recognised in this case by limiting the fees to a very 
small part of the total cost. Thus many court 
fees are retained, but the larger part of the rapidly 
growing expenditure for the support of justice is 
now met from taxes. Those functions, in con- 
nection with which there are fees, are regarded as 
conferring a divided benefit. The individual pays 
for what he receives, the State for what the public 
gains thereby. 

Sec. 2. The extension of the fee system by the 
courts to cover a very large part of the cost of the 
judicial system, even to such a degree as judicial and 
to make litigation impossible to all but legal fees. 
the rich, was a transition stage in the develop- 
ment from the middle ages to the present. No- 
where was the fee system for court costs more abused 
than in England. Later practice, while placing 
more of the burden on the general treasury, has re- 
tained an extensive tariff of such "costs." More- 
over in not a few instances, the assessment of the 
" costs " upon the party responsible for the litigation, 
as shown by the fact that he loses his suit, makes 
these fees approach in character punitive fines. 
This is the characteristic of American practice. 
In many cases the special benefit conferred is not 



262 INTRODUCTION TO PUBLIC FINANCE part n 

very clear, but is arbitrarily assumed to exist and the 
fee levied as though it were for such benefit. 

Since the middle of the seventeenth century, a 

large part of many of the legal fees have been col- 

„ ,. lected by means of stamps or stamped 

The collection J r r 

of fees by paper, the latter being necessary to le- 
stamps. galize the transaction ; the officer who 

furnished or cancelled the stamp being supposed 
to investigate and vouch for the propriety of 
the transaction. A notary's fee in most of the 
American commonwealths is of this character, the fee 
being receipted for by a stamp embossed upon the 
paper. Similar fees or taxes on acts and transfers 
are very common in France. Other such fees are 
collected in the form of the sale of a license to per- 
form certain acts which would not be legal without 
such a permit ; and then there is a charge for record- 
ing the act after it has been performed in accord 
with the permit. Of this character are the fees for 
marriage licenses and recording of marriages. The 
act itself is, also, often subject to the payment of a 
tax. The general character of the legal fee is seen 
from the following list : fees for passports and similar 
papers of identification, fees for recording and 
legally recognising births, deaths, marriages, and 
divorces, changes of residence or legal standing, for 
papers in evidence of honours, degrees, orders, titles, 
offices, etc., for patent rights and copyrights, for 
consular services in vouching for invoices, etc. 

Sec. 3. Many of the acts of the various adminis- 



chap, xi FEES AND INDUSTRIAL EARNINGS 263 



* 



trative departments are of such a character as some- 
time to confer a special benefit upon individuals 
for which a fee is charged. The police Administra- 
may render extraordinary services as in tivefees. 
the protection of property on special occasions, on 
the control of masses of people, preventing intrusion, 
etc. Examples of these special services are very 
frequent. The same is true of the special services 
of detectives for private persons. 

Fees for public education are gradually falling 
into disuse. They were originally charged for all 
grades of instruction from the lowest up Educational 
to the university. The importance of f ees - 
primary education to the general welfare of the 
people and to the prosperity of the State, when 
governed by popular franchise, led to the abolition 
of fees for that grade of instruction at a very early 
date. In England, owing to the prevalence of an 
extreme laissez-faire view upon this subject, fees 
for education were continued longer than in most 
countries, having only very recently been entirely 
abolished. In the higher grades, wherever such 
were in charge of the State, fees were retained 
much longer than elsewhere. The great univer- 
sities of the American commonwealths have set 
the example of free tuition for their thousands 
of students, although they still retain a number of 
small fees for registration, diplomas, and certain 
incidental expenses connected with laboratory and 
similar instruction. European State universities 



264 INTRODUCTION TO PUBLIC FINANCE part n 

still generally retain the fee system for most of the 
lecture courses. Schools intermediate between those 
giving rudimentary education and the universities 
are generally managed without fees, like the lower 
grades. Educational functions of governments seem 
to have been going through the same transformation 
which roads have gone through. Already the larger 
part of the cost is met from general taxes and but a 
small part from fees. Finally the remaining fees 
will fall away. 

In those countries in which the State supports the 
churches, or churches of a certain denomination, 
there are a number of fees connected 
therewith, such as those for the use of 
churches and church-yards, for baptisms, christen- 
ings, marriages, burials, confirmations, and com- 
munion. The means for meeting the rest of the 
expenses are drawn from two sources. A part is 
sometimes taken from the general taxes or from 
special taxes collected for the purpose, and the 
remainder from voluntary contributions by the 
attendants, or from the sale of sittings and the like. 
This is the only important remnant of voluntary 
contributions in any part of the financial system. 
In most instances the voluntary contributions are 
for special purposes, organised charity, missions, 
etc., which are, perhaps, not properly considered of 
a public character. 

The fees rendered by individuals in connection 
with their industrial and commercial enterprises are 



chap, xi FEES AND INDUSTRIAL EARNINGS 265 

very numerous. The oldest and simplest are charges 
for the use of market places, later for the use of public 
exchanges, etc. ; then come the charges The fees for 
for statistics collected by public officers, s ^ vices °f* he 

•> r ' btate to pn- 

and the charges for the use of bridges, vate industry. 

roads, qua} r s, etc. The modern substitutes for roads: 
railroads, canals, street railroads, omnibuses, are 
already passing from private into public hands and 
the period of transition is marked by a more and 
more extended use of the fee system. Other means 
of communication, the post, the telegraph, and the 
telephone, are of the same character. Fees for 
coinage are also for services to commerce. They 
are in use by every country in some form or other. 
In the United States the charge for coinage was one- 
fifth of one per cent. England allows the Bank of 
England to make a similar charge when advancing 
notes upon bullion, and to set the price in notes for 
gold coin and gold bars. These fees must not be 
confused with the charges known as seigniorage, the 
latter being a tax upon commerce. 

Sec. 4. One of the most important classes of fees 
is formed by special assessments. They are for some 
benefit to real property. A special assess- special assess- 
ment is a fee paid to cover the cost, less Wl «w*«. 
that of supervision by a salaried public officer, of a 
specified improvement to property undertaken in the 
public interest. In his excellent study on this 
subject Mr. Rosewater 1 tries to establish a difference 
1 Columbia 'College Studies, II., 3. 



266 INTRODUCTION TO PUBLIC FINANCE part n 

between fees and special assessments. He admits 
the similarity, but points out that special assess- 
Spedai assess- nients are restricted in purpose and in 
ments are fees, place, are apportioned among the mem- 
bers of a class, are assessed once and for all and for 
benefits to real property only. Professor Seligman 
makes the same distinction. But it is certainly not 
defensible on purely theoretical grounds, for the 
differences are not essential but accidental. We 
might as well set up a separate class of taxes on 
marriages, for they are restricted in purpose, are 
assessed upon members of a class, once and for all, 
and are for benefits to the family only. Like all 
other fees, special assessments are imposed by the 
taxing power, cover both public and private benefits, 
and do not exceed the costs. 

The simplest case of a special assessment is when 
a street is to be built, with necessary sewers and 
„ , . water-pipes. The costs of this have to 

Example of a r r 

special assess- be met. There is a public interest in 
the street as a thoroughfare. Private 
enterprise cannot be trusted to properly protect the 
public interest. The city, therefore, must step in. 
It could pay the cost from general taxes or from 
tolls, of both of which the specially benefited persons 
would pay their share. But in that case, tempo- 
rarily at least, the abutting land-owners would reap 
an unearned harvest at the expense of their fellow- 
citizens. It appeals to our sense of justice that they 
should pay for it. They can always afford to do so, 



chap, xi FEES AND INDUSTRIAL EARNINGS 267 

as they gain by the improvement. This system has 
received large currency in the United States, and has 
according to Mr. Rosewater's extensive investiga- 
tions given general satisfaction. 

Another method has been used to some extent in 
England. It is similar to that used by private 
speculators in America, when they open up a new 
city, or suburb. The city condemns and buys up 
enough of the land to be improved to furnish, when 
sold after the improvements, the funds needed. 
This method has a very limited application. 

Special assessments are not frequent in Europe, but 

do occur. Mr. Rosewater finds them in varied form in 

France and Germany ; and they are pro- „ . . 

J J r Special assess- 

posed in England under the name of the ments not used 
"betterment" tax. In the last-named inEur °P e - 
country they were early applied to "walls, ditches, 
gutters, sewers, bridges, etc., damaged by the sea." 
But not until lately has the principle of measuring 
the tax by the particular benefit been applied or pro- 
posed, and even now the principle is not quite clear. 
In England the assessment is to cover the cost of 
the removal of injury rather than the cost of con- 
ferring a benefit. In England the cost of improve- 
ments is assessed in general taxes from which certain 
unbenefited districts are exempt. Strictly speaking, 
the principle is not regularly applied in England 
at all. 

In the United States this fee finds almost uni- 
versal acceptance. It is, indeed, remarkably well 



268 INTRODUCTION TO PUBLIC FINANCE part ir 

suited to the economic conditions of a new country, 
and renders rapid improvement possible. In some 
„ 7 7J parts of the country there are harmful 

Good results L J 

in the United results that arise from the desire to 
give property owners full control over 
the improvements for which such assessments are to 
be made. Thus, in some commonwealths, street im- 
provements are only made with the consent of the 
owners of a majority of the property concerned. 
The result is that streets are opened irregularly, and 
some of the main streets are untouched while side 
streets are improved. But this is an evil of expen- 
diture rather than necessarily connected with this 
mode of collecting the revenue. The abuses of spe- 
cial assessments are few, and, on the whole, it is a 
part of the tax system of which America can be justly 
proud. Professor Bastable's criticism (p. 377) of 
these fees rests upon a misconception of the method 
of handling the assessments. They are assessed 
according to the cost of the improvements ; the 
special benefit is the justification of the contribu- 
tion, not its measure. There is seldom any difficulty 
in apportioning the cost fairly. No charge need be 
made for any additional benefit beyond the cost, and 
the contributor has, usually, a voice in deciding 
whether the proposed improvement shall be under- 
taken or not. 

In view of the fact that the prevailing theory 
of taxation in this country is that which we have 
designated as the benefit theory, it is natural that 



chap, xi FEES AND INDUSTRIAL EARNINGS 269 

Americans should have been the ones to have made 
the application of the theory in this particular case. 
The special assessment is applied in "just „ . , 

r rr j special assess- 

those cases in which it is easiest to ments and the 
measure the special benefit. And al- ene ^ ieory - 
though the principle cannot be given a wider appli- 
cation with any degree of satisfaction, it does, in 
this instance, comply with the demands of justice 
and equality. It would, moreover, be rather hard to 
find under the faculty theory any better justification. 
Sec. 5. The post was included above among those 
functions for which fees were charged. Whether 
that be quite correct or not depends upon 

. . Postal fees. 

the way in which the postal system is 
run. If it is run so as to yield the largest possible 
revenue over and above expenses, it is of exactly the 
same character as any other industrial enterprise upon 
which the State enters. The State sells postal ser- 
vices for the highest price it can get, or rather, for 
the largest net return. Its profits, the post office 
being a monopoly, are regulated by the principle of 
charging what the traffic will bear. But no post 
office is run on this principle. The importance of 
the public service rendered has led to the recog- 
nition of a large element of common benefit. This 
recognition has not resulted in the entire abandon- 
ment of charges for the service except in a few 
instances ; for example, the free carriage of news- 
papers in the county in which they are published. 
But it has led to the attempt to run the service in 



270 INTRODUCTION TO PUBIIC FINANCE part n 

such a way that expenses shall be met, and only a 
small surplus, if any, shall accrue to the benefit of the 
treasury. Whenever the surplus tends to grow, the 
rates are lowered or the service improved. Of all 
the powers, Great Britain is the sole exception to 
this rule, about one-third of her postal receipts be- 
ing profits. (1895, receipts £10,760,000, expenses 
£6,869,000. But the allied telegraph service ran 
behind; receipts £2,580,000, expenses £2,674,000.) 
The postal rates in Great Britain are as low as in 
other countries, but the surplus is accounted for by 
the extremely small size of the territory covered 
by the land service, the concentration of population, 
and the cheapness of water transportation, all of 
which makes it particularly easy to do a large and 
profitable business at low rates. 

There are some writers who regard any surplus 
acquired in this way as practically the result of tax- 
D . , , ation, and class any charge for the pub- 

Postal surplus j a r 

not the result lie service, above the cost thereof, as a 

Of taxation. • -, , mi • l -n j." 

special tax. Inis classification presup- 
poses that the service is, by nature, of a public 
character, an assumption contrary to the fact, for no 
function except that of governing itself, in the nar- 
rowest possible sense, is by nature of a public charac- 
ter, nor, on the other hand, by nature of a private 
character. On this consideration, therefore, it is 
better to class these gains, not as taxes, but as the 
earnings of a public industry. 

Sec. 6. In modern times public industries can be 



chap, xi FEES AND INDUSTRIAL EARNINGS 271 

quite as properly considered under the head of 
expenditure as under that of revenue. Historically, 
State industries, like public or princely domains, 
lands, forests, and mines, were mainly p uo u c i n d us - 
sources of revenue. But a railroad is tries not pri- 

. marily for the 

placed m the hands of the State primarily sa # e freve- 
because of the public interests involved, nue - 
and the expenditure for that purpose is more signifi- 
cant than the moderate surpluses that accrue, in 
some cases, to the government. For that reason we 
called attention to these activities under the head of 
expenditure. We have now to consider them as 
productive of so much total wealth, a part of which 
is immediately spent for the purpose which led the 
Statednto this activity, and a part, generally a very 
small part, saved to assist in the accomplishment of 
other purposes. 

The oldest form of public property is land. The 
public land originally embraced all the territory of 
the State. Gradually parts of it were 

. Public lands. 

alienated to a private purpose subject 
only to the law of eminent domain; but considerable 
portions even to the present day belong to the State, 
or what is the same thing, to the local governments. 
In the monarchies of Europe such lands were once 
considered the property of the prince. These lands 
were the main reliance for public revenues in the 
feudal State. As the people gained a voice in the 
government they laid claim to these sources of 
revenue for public purposes. From that time on, 



272 INTRODUCTION TO PUBIIC FINANCE part n 

the public domain diminished both absolutely, by 
sale or alienation, and relatively as the wealth of 
the people swelled. Some countries adopted a very 
conservative policy in this respect, and retained 
their domains in land and forests, while others 
adopted the plan of steadily disposing of them. 
German states are examples of the former policy, 
while England, France, and the United States have 
been examples of the latter. England receives only 
£400,000 annually of "Woods, Forests, and Land 
Revenues of the crown." In the United States it 
was the possession of vast tracts of land by the 
federal government, acquired by gift from the com- 
monwealths, and by purchase, which gave that gov- 
ernment an independent territory over which its 
control was absolute and formed one of its strongest 
supports, contributing most materially to the growth 
of federal influence. But the public lands have not 
been a source of revenue to the government. The 
money received from settlers has amounted to little 
more than fees for the registration of titles, and ex- 
cept for the ten years from 1830 to 1840 the lands 
have not yielded a clear revenue. The extensive 
surveys which the government carried out have been 
a large expense attributable to this source. Under 
constitutional government there is little danger of 
the failure of taxation as a permanent and regular 
source of revenue. So that public lands are not re- 
garded as necessary for the integrity of the govern- 
ment. The retention of public lands in Germany 



chap, xi FEES AND INDUSTRIAL EARNINGS 273 

and Austria is not explainable by any clanger of the 
failure of taxation, but by the greater tenacity of 
the older communistic idea. Democrat- No reason for 
ically governed cities and towns cling to th f ret f ntion 

J ° ° of public lands 

their lands as strongly as the royal gov- to-day. 
ernments. Prussia's public lands and forests yield 
about 50,000,000 M. annually after all expenses have 
been met. Cities and towns get as much more, and 
in many cases supply burgher families with wood 
without charge. In Russia the process of emanci- 
pating the serfs has changed the receipts from 
public lands into taxes, and left practically little 
revenue of the older character. In spite of the ab- 
sence of constitutional government Russia has gone 
faster, in proportion to wealth and revenues, in the 
abolition of public domains than many German 
states. Russia's gross receipts from domains are 
about $12,500,000, while Prussia's are nearly $22,- 
000,000. The alienation of public lands in Russia 
is recent, and it has progressed as that country 
advanced in civilisation. 

Except when in charge of a highly trained body 
of expert officials, as in Germany, the public lands 
do not form a satisfactory source of rev- Public control 
enue. Thev are not as a rule as well °ff°* ests a 

J public neces- 

managed as similar lands in private sity. 
hands. Forests form an important exception to this 
statement. A private owner cannot afford to wait 
long enough for economical use of timber land. 
The destruction of forests at private hands is a seri- 



274 INTRODUCTION TO PUBLIC FINANCE part n 

ous danger. Only a permanent, long-lived institu- 
tion like the government can take proper care of 
forests. 

Closely allied with the public ownership of lands 
and forests is the public ownership of mines. This is 
Ownership of one oi the oldest State industries, which 
mines. j s f i a t e falling into disuse. The work- 

ing of mines by the government is being replaced in 
Europe by a system which allows of private opera- 
tion, but guarantees the public interest by the col- 
lection of royalties, or mining taxes. In the older 
countries, where the idea of public territorial owner- 
ship is stronger, the old system still prevails, and, 
even where it is partially surrendered, the revenues 
derived from royalties and taxes are proportionately 
large. But in the new countries of the American 
continent and Australia private ownership generally 
prevails, and no more revenue is derived from this 
source than from any other taxed industry. The 
feudal idea of territorial ownership, a remnant of 
of which still survives in those countries of Europe 
which retain their interests in the mines, is very 
different from that of private ownership in fee 
simple as in America. This accounts for the dif- 
ference in the revenues from this source. 

Sec. 7. But while the modern State has surren- 
dered the extractive industries, a great many others 
Other Indus- have been undertaken, not so much as 
tries - sources of revenue as because of the 

importance of the public interests involved. Be- 



chap, xi FEES AND INDUSTRIAL EARNINGS 275 

fore this century the most striking instances are of 
the production of some commodity needed for the 
public service or of articles of an artistic and costly 
character. Examples of the latter are the Gobelin 
tapestries and the Sevres ware. In supplying 
arms, forts, vessels, public buildings, and the like 
there is no uniformity of practice among the nations. 
In only a few cases is the method regularly that of 
government production. There is a similar absence 
of uniformity in practice in regard to all those in- 
dustries which involve large public interests for the 
conservation of which there is under private manage- 
ment no good guarantee. In some cases, as the 
water supply, there is a general tendency in the 
direction of public ownership. Whenever, as in this 
case, a public interest is absolutely paramount to 
every other consideration, there is little attempt to 
make the industry a source of revenue beyond what 
is necessary to maintain the service. These indus- 
tries, therefore, tend rapidly to be supported by fees 
or taxes. Inasmuch as it is generally the impor- 
tance of the public interest that led to the assump- 
tion of the industry by the government, this tendency 
is universal. Roads, canals, the water supply, the 
post office, telegraph, telephone, and the railroads 
all pass more or less rapidly through these stages 
according to the importance ascribed to the public 
interest in them. As already seen, the post office 
is now primarily supported by fees. The funds for 
the support of water-works are generally collected 



276 INTRODUCTION TO PUBLIC FINANCE part n 

from the users, as fees, or from certain classes of 
persons as special taxes, but seldom as prices for the 
service. The experience of nations with State-owned 
railroads is too recent and too varied to be very 
instructive. States have been led into the owner- 
ship and operation of railroads : first, because the 
roads needed the support of public credit; second, 
because of military interests ; third, because of 
the failure of private companies to protect public 
interests. Railroads have more often been a source 
of public expenditure than of public revenue. In 
Prussia alone have the financial results been such as 
to add materially to the income of the treasury. 
The question of government ownership of railroads 
is one involving considerations broader than merely 
fiscal ones and does not properly belong to our 
subject. In no case is it at all likely that merely 
fiscal considerations will have more than a deterrent 
effect upon the solution of the problem of the gov- 
ernment's action in regard to the management of the 
railroads. 

While the industrial, commercial, or other eco- 
nomic functions of the State are of continually grow- 
Public indus- ing importance, they are not likely to be 
try not likely largely a source f net revenue. No- 

to be a source ° J 

of net revenue, where do we find principles that would 
lead us to anticipate that revenues of this character 
will ever supply the place of taxes. Indeed, if the 
usual evolution continues, these functions may be 
performed by the State without a special charge 



chap, xi FEES AND INDUSTRIAL EARNINGS 277 

upon the benefited persons, and, while the liberties 
of the people in respect to the enjoyment of these 
facilities will be greater, the burden thrown upon 
general taxation will be equally so. If a city now 
supplies a sewer system to citizens free of special 
charge except for first construction, it may with the 
same logic supply water. If a State furnishes roads 
at common cost, it may certainly so far modify the 
management of railroads as to apply the fee system 
and forego the collection of any surplus, though in 
this case, as in that of the post office, there would 
seem to be as yet no sign of any tendency to go 
beyond the fee system. 



PART III 

PUBLIC INDEBTEDNESS 



CHAPTER I 

THE GROWTH AND NATURE OF PUBLIC CREDIT 

Section 1. The national governments of the civ- 
ilised world to-day owe more than twenty-seven and 
The size of one-half thousand millions of dollars, or 
public d°bts. fi ve an( j one-half thousand million pounds 
sterling. With the addition of the debts owed by 
the local governments this sum exceeds thirty thou- 
sand millions of dollars, or six thousand million 
pounds. The exact figures according to the Eleventh 
Census of the United States are : 

National debt of all countries . . $27,524,976,915 
Local debt of all countries . . . 2,824,950,694 

Total . . .' . $30,349,927,609 

According to the best authorities the national in- 
debtedness of the world has increased fourfold since 
1848. 

278 



Aggregate debt. 


Increase. 


Per cent 


$7,627,692,215 




of increase. 


10,399,341,688 


$2,771,649,473 


36.34 


17,117,640,428 


6,718,298,740 


64.60 


27,421,037,643 


10,303,397,215 


60.19 


27,524,976,915 


103,939,272 


6.38 



chap, i NATURE OF PUBLIC CREDIT 279 

Years. 

1848 . 
1860 . 
1870 . 
1880 . 
1890 . 
[From the Eleventh Census.] 

The increase of national indebtedness since 1880 
has been comparatively slight. But this is partly 
due to the payment of a large part of the national 
debt of the United States. Other countries have 
continued the process of debt-making — although less 
rapidly, owing to the continuance of peace. The 
above figures do not include pensions, which are 
really debts in the form of annuities. 1 

While the absolute amount of the debt has in- 
creased, the burden has materially decreased since 
1880, owing to the increase in popula- T] b 
tion and wealth. In 1880, the national has decreased 
indebtedness of countries other than the 
United States amounted to ¥35.6-1 per capita, while 
in 1890 it was 132.90 per capita. The national debt 
of the United States was reduced absolutely by over 
a billion dollars, and relatively from $38. 33 per 
capita to $14.24 per capita. Of course statistics of 
this sort are neither perfectly accurate nor easy to 
interpret. The only proper comparison between 
different countries would be that of the ratio of the 

1 If these were included and capitalised at ten years' purchase, 
which would, perhaps, be a fair average, they would add to the 
debt of the United States at least $1,400,000,000. 



280 INTRODUCTION TO PUBLIC FINANCE part iii 

interest charge to the annual income of the people. 
But the annual income is very difficult to ascertain, 
and the errors would, probably, be so great as to 
destroy the significance of the result. But these 
figures, while not absolutely correct, are sufficiently 
so to indicate that the policy of borrowing has be- 
come a most vital part of the system of public 
finance. The cause of these debts is almost exclu- 
sively war and the preparation for war. If the ex- 
penses of war and its preparation had been excluded 
from the finances of most nations, and the finances 
relieved of the subsequent burden of interest, civil- 
ised nations would have been easily able to meet 
their current expenses. In England the annual 
public-debt charges for interest and debt payments 
consume more than one-fourth of the annual rev- 
enues from every source ; £25,200,000 out of <£97,- 
297,361. The policy pursued by England is to 
make the debt charge permanent at that amount, 
using all that can be saved over and above the inter- 
est charges for the payment of the principal. The 
funded debt of France, the largest ever contracted 
by any country, imposes an interest charge of $176,- 
461,275 upon a total revenue of $650,372,370. If 
we include certain annuities and pensions, more than 
one-third of the revenues of France are consumed 
in this way. 

Germany is the only country of importance that 
does not now rely entirely upon the possibility of 
borrowing money in case of war. That country has 



chap, i NA TURK OF PUBLIC CREDIT 281 

a special cash reserve of §30,000,000, which is avail- 
able for immediate application to war purposes 
should it be needed. Although the Germany's 
German Empire began in 1871 without cash reserve. 
debt, it now has a debt of 185,000,000 in excess of 
its available assets. This is all due to armament. 
So that, although Germany holds a cash reserve for 
military purposes, it is practically a borrowed one 
and she is making her preparation for war on bor- 
rowed money. This policy does not differ essen- 
tially from that of other countries. In the middle 
ages, however, as in classical times, it was the prac- 
tice of nations to accumulate a treasure for war pur- 
poses in advance, by collecting more revenue each 
year than was needed. This practice is now obso- 
lete and is also indefensible as too costly. 1 

Modern nations, then, practise a method of deficit 
financiering. They make provision in their annual 
revenues for the current, regular, or Deficit finan- 
" ordinary" expenditures only, and rely cierm 9- 
for funds at other times upon their ability to borrow. 
What then constitutes this ability to borrow upon 
which so much reliance is placed that even the very 
existence of the nation is allowed to depend upon it? 
Since when, and how is it that nations have been 
able to rely so absolutely upon public credit? The 
answer to both these questions is contained in the 
analysis of public credit. 

Sec. 2. Public credit is only one form of general 
1 See Bastable, p. 567. 



282 INTRODUCTION TO PUBLIC FINANCE part in 

credit, and it is comparatively easy to point out 
p bv • d't wnere i n the former differs from the lat- 
a form of gen- ter. But credit in itself is by no means 

eral credit. , j n o -i , £ , i 

easy to define, scarcely any two ot the 
able writers who have treated the subject are agreed 
as to its most important features. It has, moreover, 
Difficult to as a term in common use, suffered so 
define credit. ma ny subtle changes in meaning in the 
course of its history as to leave its modern signifi- 
cance full of dangerous variations. The ordinary 
business man uses the word daily to convey half a 
dozen or more different ideas without recognising 
the differences. Scientific writers have Avaged long 
and bitter controversies concerning its proper defini- 
tion. 1 Without going deeply into the controversy, 
we may say that there are practically three opposing 
views as to the real nature of credit. First, there 
are those writers, who, like Nebenius and Rau, start 
Three oppos- from the etymological meaning of the 
ing mews as £ erm anc [ maintain that the confidence, 

to the nature 

of credit. or trust, reposed by the creditor in the 

ability of the debtor to fulfil an agreement in the 
future is the chief element in credit. 2 Second, there 
is a class of writers who, like Knies, regard this ele- 
ment of confidence, a mere psychical condition, as 

1 A good idea of the extent of the controversy and of the con- 
flicting views can be gained from Knies, Der Kredit, Berlin, 
1876. 

2 Nebenius, Der offentliche Credit, Carlsruhe und Baden, 2d ed., 
1829 ; Rau, Finanzwissenschaft, 3d ed., Heidelberg, 1851 ; II. Abt, 
p. 248. 



chap. I NA TURE OF PUBLIC CREDIT 288 

too intangible, too immaterial, to be of any value for 
a scientific definition. They proceed entirely from 
observation of those transactions which are said to 
involve the use of credit, and find in all such trans- 
actions one feature which is never present in trans- 
actions not designated as credit transactions. That 
feature is that the completion of the transaction is 
regarded as being postponed to a future time. This 
element of time, this postponement, must then, they 
argue, be the essence of credit. Credit is, in their 
eyes, merely a means of transferring ownership tem- 
porarily, a means of paying for present goods with a 
greater quantity of future ones. Third, there is 
still another school, who, like McLeod, regard credit 
as analogous to money, money being regarded as 
representing claims on the wealth of the whole com- 
munity, while a credit is a similar claim on the wealth 
of some particular individual. McLeod even goes 
so far as to identify the claim, the order, the promise 
to pay, or the right to demand with " the credit." 
" A credit," says McLeod, " in Law, Commerce, and 
Economics, is the Right which one Person, the 
Creditor, has to compel another Person, the Debtor, 
to Pay or Do something." 1 Professor Sherwood has 
developed this in a more scientific manner. 

1 Theory of Credit, I., 315. In a very scholarly article pub- 
lished in the Quarterly Journal of Economics, January, 1894, 
Professor Sherwood discusses the nature and mechanism of credit 
in a way to throw a great deal of new light upon the subject. I 
do not believe that his analysis can be improved upon. He dis- 
tinguishes particularly the credit basis of money, as generic or 



284 INTRODUCTION TO PUBLIC FINANCE part in 

Sec. 3. These definitions, apparently so contra- 
dictory, are not altogether irreconcilable. They 
Reconciliation represent different points of view rather 
of these vieivs. than real differences in meaning. Cer- 
tainly nothing bnt credit is described by any one of 
the three definitions, and certainly there are shades 
of the meaning of the term that are aptly described 
by each of them. As is so often the case when a 
word in common use is defined for scientific pur- 
poses in several ways, we find that one definition fits 
certain classes of things covered by the term better 
than others. There are certain debts, for example, 
in which the element of trust is paramount, others 
in which that of time is more important, and again 
some in which the element of claim or demand is the 
distinguishing thing. But it is also true that there 
are no cases of the existence of credit where all 
three of these features do not appear, the one or the 
other varying in importance as the case may be. 
To fully understand a thing so many-sided as credit, 
it is necessary to examine it from several points of 
view. 

If we start from the etymological meaning of the 
term we cannot avoid the conclusion that one of the 
chief elements of credit is trust. Certainly without 

universal credit (which he calls "customary credits"), from that 
of the commonly so-called credit transactions, which he calls 
" formal credits." It is with the latter only that we are concerned 
here. They are legally enforcible. They rest in the economic 
sense "on a psychological trait of faith in the uniformity and 
reasonableness of other men's voluntary acts." 



chap, i NA TURE OF PUBLIC CREDIT 285 

that intangible, immeasurable feeling or frame of 
mind known as confidence, trust, or faith, on 
which Knies pours so much scorn, no ~ „, 

r Confidence a 

debts would have come into existence, necessary 
As Professor Cohn well says, " Credit par ' 
rests on the development of opinions and institutions 
which arise with the general advance of civilisa- 
tion." 1 Modern usage has not yet eliminated this 
original meaning from the term. It cannot be 
altogether incorrect to make this a part of the defi- 
nition. It is customary enough to conceive that 
credit or faith is reposed by the creditor in the 
debtor, and that it varies in amount, although never 
exactly measurable. But there are many credit 
transactions in which the element of trust shrinks 
into insignificance. An advance on a warehouse 
receipt, a Lombard loan, a pawn-broker's advance, 
all of these and many like them are credit transac- 
tions, but the element of personal confidence plays 
little part in these. The creditor in these cases 
never has to consider the character of the debtor 
nor his ability or willingness to pay. After he has 
satisfied himself as to the value of the security, all 
that he has to consider is the time the Time also 
debt has to run. It must be admitted, ess entiai 
then, that there are a number of cases of credit 
transactions in which the paramount element is that 
of time. The first two of the above-stated views of 
the nature of credit are, therefore, reconcilable in 
1 Gfrundlegung, p. 553. 



286 INTRODUCTION TO PUBLIC FINANCE part in 

this way. They may be regarded as essentially the 
same with a difference in the emphasis, and it is 
correct to change the emphasis when different kinds 
of debts are considered. Both of them may be 
covered by one definition, which may for two reasons 
be called the subjective definition: (1) Because it 
takes into consideration feelings, opinions, i.e. trust, 
confidence, belief. (2) Because it looks at credit 
from the natural point of view of the creditor who 
entertains that trust. 

Subjective Definition. — From the subjective stand- 
point credit is the confidence or trust reposed by 
one person in the ability of some other person to 
fulfil a promise at some future time. The emphasis 
will fall upon the feature of trust or upon that of 
time according to the nature of the particular debt 
in point. 

But that is not all : we have yet to dispose of that 
view which identifies credit with the claim which 
the creditor has on the debtor. In one aspect this 
view seems absolutely contradictory to that which 
we have adopted. So much so that Knies ridicules 
it, considering it quite as absurd as the reasoning of 
John Law. He says it makes the debtor give 
credit : i.e. he gives the claim, and the claim is 
credit. But McLeod's reasoning is not so easily 
The objective disposed of . He has taken what may be 
point of view. we n called the objective view. He has 
sought out embodied credit. His, too, is the natu- 
ral point of view of the debtor. The opposition, 



chap, i NATURE OF PUBLIC CREDIT 287 

therefore, between the two views is more apparent 
than real, and arises from the fact that this is 
from a different point of view. There are two 
sides to the shield. The debtor sells a claim, 
which is a more or less tangible thing having a 
present value, just as many another claim has ; 
as, for example, a patent right or a copyright. 
The debtor is concerned only with the value of that 
claim. The creditor, however, looks beyond the 
claim and desires to know whether he can trust in 
the ability of the debtor to make the claim good. 
By a very natural analogy, too, the language of 
business says that the debtor enjoys good or bad 
credit, as though the trust reposed in him by others, 
in whose minds it exists, really became an attribute 
of him. There is still more ground for McLeod's 
view, for, as has already been remarked, it is often 
the nature of the claim created that adds to, or de- 
tracts from, the credit. Any man in ordinary times 
can obtain credit if he comes prepared with collat- 
eral security and is ready to create a claim that is 
good on that in case his other resources fail him. 
It is clear, then, that the view of McLeod is im- 
portant, and also that it is supplementary to that 
already adopted. It reveals many phases of credit 
that cannot be seen at all from the subjective point 
of view. The two views taken together make a 
complete explanation. 

Objective Definition. — From the objective stand- 
point, credit is embodied in claims which are ac- 



288 INTRODUCTION TO PUBLIC FINANCE part in 

cepted by the creditor in payment. These objective 
claims have a value like every other exchangeable 
commodity, and are recorded in the various " instru- 
ments of credit." 

If these two definitions are accepted, we can pro- 
ceed to point out wherein public credit differs from 
Public credit ordinary or private credit. The pecul- 
difiersfrom - ar con ditions which distinguish public 

ordinary ° x - 

credit. credit from ordinary credit arise from 

the fact that the debtor is the State. The State, 
being above the law, cannot be compelled, as the 
private individual can, to pay its debts. Public 
credit is therefore subjectively defined as the confi- 
dence or trust reposed in the ability and willingness 
of the debtor (the State) to fulfil its promises at some 
future time. Objectively the claim (in this case the 
bond) shrinks to the character of an unsupported 
although generally accepted promise. There are, to 
be sure, some important cases in which the claim is 
apparently supported by something more definite 
than the mere promise of the debtor; as for example, 
when the revenues from certain productive enter- 
prises are pledged for the support of the debt 
charges. But even in these cases, the creditor has 
no real resource against intentional bad faith. In 
general the subjective standpoint gives a better 
view of public credit than the objective, because 
the claims cannot be enforced. 

The fact that the debtor is the State has other 
important consequences. (1) The State has sover- 



chap. I NA TURE OF PUBLIC CREDIT 289 

eign power and can compel its subjects to lend to 

it ; or, on the other hand, the creditor may make 

advances on rather poorer terms than he Other differ- 

would otherwise accept, from motives enc f s etl ^en 

r ' public credit 

of patriotism. (2) The debtor State and private. 
lives forever, and hence can make perpetual debts. 
(3) Its affairs are all open to inspection, and the 
would-be creditor has full opportunity to know its 
ability to pay. (4) Public credit may be divided 
into various parts, according as it is the credit of the 
central government or of some subordinate depart- 
ment that is being considered. The consideration 
of the relations of the different parts of the govern- 
ment in this respect belongs to the field of public 
law rather than to that of public finance. 

Sec. 4. Public credit was necessarily later in 
development than private credit. General habits 
of lending on a large scale had to be T] , 
established before nations could borrow, veiopment of 
The bankers and brokers of the world pu lcae *' 
had to develop the machinery for handling evi- 
dences of debt before large public loans could be 
placed. Then, too, inasmuch as the objective evi- 
dences of debt in the case of the government were 
nothing but the unsupported promises of the gov- 
ernment, confidence that these promises would be 
kept had to grow. At first the assurance rested on 
the honour of the monarch, or upon some pledge or 
security given by him, such as the crown jewels, crown 
lands, a lease of the revenues, and the like. But 



290 INTRODUCTION TO PUBIIC FINANCE part in 

later, as Bastable so ably shows, 1 the development of 
public credit goes hand in hand, with the develop- 
ment of constitutional government. It would seem 
that the control of the purse by the very persons 
who were to pay the taxes gave a steadiness and 
security to the financial administration that aroused 
the confidence of money owners. 

Sec. 5. Much attention has been given by differ- 
ent authors to the economic effects of public bor- 
rowing. It is now pretty well agreed that public 
borrowing does not, as was once taught, 2 create new 
wealth except indirectly, through the use made of 
the capital taken when it is used productively. 
„ . Nor, on the other hand, does public bor- 

Economic *- 

effects of pub- rowing in itself directly destroy wealth. 

lie borrowing, mi i t i i j_ i - 

' y Lhe money borrowed may be devoted to 

some form of rapid consumption, as in war. In this 
case the destruction of wealth is determined by the 
line of expenditure decided upon, not by the bor- 
rowing merely. But the feasibility of obtaining 
large sums in this way is said to lead to more ex- 
travagant expenditure than would otherwise be in- 
dulged in, since taxation for such purposes would 
be difficult. The consumed wealth is replaced by 
claims upon future wealth which are not of such a 
character as to be available as productive capital. 
But the loss incurred is distributed over many years 
instead of being concentrated in a few. As in the 

1 P. 579. 

2 " The public funds a mine of gold." 



chap, i NA TURE OF PUBLIC CREDIT 291 

case of a spendthrift who mortgages his patrimony 
for wasteful extravagance, so in the case of a nation 
which borrows for war, the evil that arises is from 
the waste, not from the borrowing. For the State 
to borrow for a productive purpose has no other 
economic effect than for a private corporation to do 
the same. 

Sec. 6. There has also been some discussion of 
the relative merits of domestic and foreign loans, 
and their differing economic effects. No serious dif- 
Sometimes it has been claimed that for- Mence in the 
eign loans involve less disturbance of e ign or domes- 
domestic industry. The intimate rela- #c &>«»*■ 
tion existing between modern nations in their com- 
mercial and industrial enterprises destroys to-day 
almost all the significance that might formerly have 
attached to such a discussion. The payment of the 
French indemnity of 5,000,000,000 francs to Germany 
after the war of 1870 was carried out in twenty- 
seven months, and not one single serious difficulty 
or disorder in the financial centres was produced 
by it. 1 So great is the mobility of modern capi- 
tal and so vast are the current transactions, that all 
of this money could be easily turned into the same 
stream without disturbing its placid surface. 

Public credit is a plant of slow growth; more than 
that it is a delicate plant. It may be The frailty of 
injured beyond recovery by a single case P uolic credit. 
of failure to fulfil the promise in which it found 

1 Blackwood" 1 s Edinburgh Magazine, Yob., 1875, pp. 172-187. 



292 INTRODUCTION TO PUBLIC FINANCE part -in 

expression. Many of the commonwealths of the 
United States have repudiated their debts, and have 
since then recovered their power to borrow but 
slowly, and in some instances scarcely at all. 1 Weak 
nations which may be or have been coerced by 
stronger and wealthier nations in the interest of 
citizens of the latter who were creditors of the 
former, generally borrow more easily than stronger 
independent nations, or parts of strong confedera- 
tions, which have failed to meet their obligations 
and cannot be coerced. 

The credit of local governing bodies depends in 
great measure upon their powers and duties in 
public law. Generally speaking, a "municipal cor- 
poration," when acting legally within the sphere 
prescribed to it, is like a private company ; — its 
obligations can be enforced by legal or judicial pro- 
cedure. Unlike the sovereign State, a municipality 
can be sued without its consent. Only with the 
positive sanction of the sovereign State can a munici- 
pality default and escape punishment therefor. 

1 Under the Eleventh Amendment to the Federal Constitution, 
a State cannot be sued in a federal court. This is contrary to the 
original intention of the constitution. See my monograph, Das 
Kreditwesen der Staaten and Stadte der Nordamerikanischen 
Union in seiner historischen JEntwickelung, Jena, 1891. Egypt is 
a good example of foreign coercion to enforce debt payment. 



chap, ii FORMS OF PUBLIC DEBTS 293 



CHAPTER II 

FORMS OF PUBLIC DEBTS 

Section 1. Governments may borrow money in 
almost any of the ways which an individual may 
use. These different forms can be best classification 
made clear in connection with their clas- should show 
siflcation. The principles upon which a omvhicheach 
correct classification should be built are deforests. 
those developed in the preceding chapter. Public 
debts are forms of public credit, and the kind of 
credit upon which each debt is based should be shown 
in the classification. Some light can be thrown on 
the different forms of debt by a review of the older 
classifications. One of the commonest distinctions 
is that between funded and floating debts. Orig- 
inally this distinction was very simple, and corre- 
spondingly useful. In the words of Adam Smith : 
" Nations, like private men, have gen- Fund d d 
erally begun to borrow upon what may unfunded 
be called personal credit, without assign- 
ing or mortgaging any particular fund for the pay- 
ment of the debt ; and when this resource has failed 
them, they have gone on to borrow upon assignments 
or mortgages of particular funds." The first of- 
these is the unfunded debt, the other is the funded 



294 INTRODUCTION TO PUBLIC FINANCE part hi 

debt. 1 But although these terms are still in com- 
mon use, the meaning attributed to them has so 
entirely changed, that to-day the so-called floating 
or unfunded debt consists, in large part, of out- 
standing claims upon very definite revenues, while 
it is often the case that no particular fund or source 
of revenue is directly pledged for the payment of 
the so-called funded debt. Hence it is that Pro- 
fessor Cohn treats Smith's grounds of distinction as 
antiquated, and says that the real distinction is 
found in the fact that the funded debts are those 
of longer duration,' and the floating debts those of 
shorter duration, " although," he adds, " different 
causes and purposes of credit lie behind the differ- 
ence in duration." 2 The most elaborate attempt 
Wagner's to explain the modern uses of these 
distinctions, terms is that of Wagner. As it is so 
complete, it is well worth summarising here. Funded 
and floating debts can be distinguished by the fol- 
lowing characteristics, which are more or less clearly 
recognisable in the different cases : (1) The purpose 
of the loan — floating debts are generally for rapidly 
passing needs, especially for the payment of the 
current dues of the treasury ; funded debts are to 
supply the capital for permanent needs of the civic 
household ; (2) continuance of the debt — together 
with the former characteristic, relatively shorter 
continuance of floating debts, at least in intention ; 

1 Wealth of Nations, V., III. 

2 Finanzwissenschaft, p. 757. 



chap, ii FORMS OF PUBLIC DEBTS 295 

longer continuance of funded ; (3) the legal con- 
ditions of repayment — in the case of floating debts 
the different items are repayable at sight or within 
a comparatively short period ; in that of the funded, 
the creditor has a more limited control over the 
principal, the debtor (the State) being bound to re- 
payment according to a fixed plan for amortisation, 
or making no agreement as to the repayment of the 
principal. This last is regarded as the essential 
test. 1 

The difficulty found in drawing a sharp line be- 
tween these two classes arises from the fact that the 
distinction is at best purely an arbitrary one. It 
may differ from State to State, or from time to time 
in the same State, according to the temporary whim 
of the public official or statistician. The terms are 
relative ones. By a floating debt is generally meant 
one that is regarded by the person using the term 
as a temporary one. One official will call any debt 
temporary, or a floating debt, which has three, five, 
or even ten years to run ; while another will refuse 
the term to any debt that is to run longer than 
six months or a year. Strictly speaking, the term 
floating debt ought never to be applied to any 

1 Most writers make use of these terms ; few have denned them 
so accurately as Wagner. For example : Adams, Public Debts, 
p. 147, concedes the term floating debt only to those in which the 
government retains the right to investigate each particular claim. 
This necessitates a new class of " temporary debts," consisting of 
treasurer's notes, bills of exchequer, and the like. Nothing would 
seem to be gained by this distinction. 



296 INTRODUCTION TO PUBLIC FINANCE part hi 

debt that is, on the face of it, to run beyond 
the end of the fiscal year next succeeding that in 
which it is created. But there is no established 
custom for such a limitation. In trying to draw a 
sharp line between these two classes we meet with 
the same difficulty that we met in attempting to dis- 
tinguish between direct and indirect taxes. But we 
have even less to go upon. Official, statutory, and 
scientific usage varies so much that nothing is gained 
by attempting to collate all the meanings. Even 
for the most general scientific purposes, therefore, 
these terms are of little value, and for the purposes 
of classification the distinction is absolutely useless. 
Sec. 2. There are two, and only two, ways in 
which a State may borrow. It may compel persons 
„ 7 7 to lend to it, or it may offer terms to 

Forced loct7is J 

and contract- which persons agree. The first of these 
will be called, for convenience, forced 
loans; the second contractual. 1 This distinction into 
two classes according to the motives appealed to is 
primary. The first class consists of loans that are 
now comparatively unimportant and rare. They 
were once very common. 2 Few nations now have 

1 Leroy-Beaulieu, Adams, and Bastable make use of a third class 
called "patriotic" loans. They have three classes, forced, pa/tri- 
otic, and " voluntary." The need of this second class is not clear. 
The patriot differs from the other creditors only in that he accepts 
worse terms, or apparently such. Unless he waive all claim to 
repayment, in which case there is no debt, his loan differs from 
those of the third class only in that it is even more " voluntary." 

2 See Roscher, § 132. 



chap, ii FORMS OF PUBLIC DEBTS 297 

resort to forced loans, even to the limited extent of 
paying their current expenses in bonds, compelling 
persons having claims to accept them. There is a 
quasi-forced loan that is of some interest. That is 
the use of irredeemable paper money, irredeemable 
This is very commonly spoken of as a paper money. 
forced loan. It must be observed, however, that it 
is a loan only when the government making such 
issues, directly or indirectly, promises to redeem the 
notes at some future time. Otherwise no debt has 
been created. When such money is issued with the 
purpose of retaining it in circulation permanently, it 
is not, in intention at least, a debt ; but it is a form 
of forced payment more akin to a tax. Even when 
there is a promise to redeem the money at some 
future time, this forced loan shows few of the funda- 
mental features of a debt. Every debt involves the 
use of credit. 1 Now from the subjective side there 
is little or no credit involved in this case. The 
trust or confidence amounts to nothing more than a 
belief in the stability of the government and a readi- 
ness to obey its authority. From the objective side 
the creditor, if we may call him such, receives a 
claim that is satisfiable not from the goods of the 
debtor as in other cases, but from the goods of the 
community, and that by law. Unlike money of 
" final redemption " these notes cannot properly 
be said to be based even upon customary credit. 
From both points of view, then, these so-called 
1 Formal credit, to use Professor Sherwood's term ; see note, p. 283. 



298 INTRODUCTION TO PUBIIC FINANCE part ill 

forced loans are scarcely more than quasi-debts. 
They are also quasi-taxes. Dietzel maintained that 
these loans were merely taxes. 

Sec. 3. Among the contractual debts the first 
thing that strikes us is that certain of the contracts 
contain features especially intended to add to or 
ensure the confidence of the creditor, while in others 
there is little or nothing looking to that end. 
This at once suggests two natural subdivisions of 
~. . . , contractual debts. On the objective side 

Divisions of J 

contractual the first class consists of claims good (1) 
upon particular funds, or (2) upon par- 
ticular revenues or the revenues of a particular 
period, or (3) upon certain definite portions of the 
general revenue permanently set aside to meet them. 
These three bases for the claims suggest three natu- 
ral subdivisions of the first class. Of these three 
again, the second, consisting of those claims which 
bear upon certain definite revenues, may be most 
conveniently analysed according to the classification 
that was adopted for public revenues. 

The most important element of those debts, the 
contracts for which contain no provisions directly 
intended to ensure the confidence of would-be cred- 
itors, is the length of time that the debt has to run, 
or what is much the same thing, the relative size of 
the demands made thereby on the general revenue. 
Here we find that certain contracts call (1) for the 
repayment of the principal only, some (2) for the 
payment of principal and interest, while others 



chap, it FORMS OF PUBLIC DEBTS 299 

(3) call for the payment of interest only. To 
shorten the matter the whole classification will now 
be presented in the form of a table. The names of 
the classes are generally self-explanatory, but in 
some cases, for clearness' sake, a concrete or a gen- 
eral example is appended. 

I. Forced Debts : (Now mostly obsolete. Akin 

thereto are the quasi-debts in the form of irre- 
deemable paper money.) 

II. Contractual Debts : 

A. The contracts for which contain provisions 
directly intended or calculated to ensure 
additional confidence. Such confidence rest- 
ing : 

1. On the fact that the sums received from 
the creditor are not expended but are 
retained to meet the debt charges. 
These are of two kinds : 

a. Voluntary deposits : 

1) Without interest. Ex. Post-of- 
fice orders. 

2) With interest. Ex. Deposits in 

public banks, etc. 

3) Insurance (not compulsory). 

b. Statutory deposits : 

1) Guarantee funds of various kinds, 
with and without interest. Ex. 
Deposits by insurance companies 
to protect policy holders, etc. 

2) Insurance (compulsory). 



300 INTRODUCTION TO PUBLIC FINANCE part in 

3) Deposits of coin or bullion to 
secure circulating notes. Ex. 
United States silver and gold 
certificates. 

4) Estates in hands of the courts 
pending litigation. 

2. On the fact that definitely specified 
revenues are set aside for the payment 
of the debt (subdivided according to 
the classification of revenues). 

a. Based generally on the revenues of a 
definite period. Debts contracted in 
anticipation of the revenues. Ex- 
chequer bills and redeemable notes. 

b. Based on prices. Ex. Money bor- 
rowed for the establishment of some 
productive enterprises carried on in 
competition with private enterprises 
of the same character. 

c. Based on fees. Ex. Municipal bonds 
for water- works. 

d. Based on special taxes : 

1) By the method of farming taxes 
(now obsolete). 

2) By appropriating special taxes, 
(or a percentage of all taxes) 
and putting the funds thus re- 
ceived into the hands of trus- 
tees, for the payment of the debt. 

B. Where confidence is so assured that no 



chap. II FORMS OF PUBLIC DEBTS 301 

special means are taken to aronse it. Clas- 
sified according to the thing promised : 

1. Principal only. Ex. Redeemable notes 
(money) not legal tender, and not as- 
sured by any deposit. 

2. Principal and interest : 

a. Bonds sold in the market for what 

they will bring, and bearing a fixed 
rate of interest, payable at a set 
time or in instalments. 

b. Annuities, terminable at the end of 

a definite or indefinite period, as a 
term of years or a life, so calculated 
that at the end of the period the 
amount paid shall equal the princi- 
pal and interest. These may be in 
many different forms; they may be 
arranged in the form of life an- 
nuities, of pensions, of lotteries, or 
in that of tontines and the like. 

3. Interest only : 

a. " Perpetual bonds," in the case of 

which the creditor has no right to 
demand the payment of the bond 
within any definite period, but the 
government may generally, after a 
fixed time has elapsed, redeem the 
bonds for a stated sum. 

b. Permanent annuities. 

Sec. 4. In the great majority of cases in modern 



302 INTRODUCTION TO PUB II C FINANCE part hi 

times, the leading nations are able to borrow with- 
out particular reference to any special means of 
arousing confidence. The long period through 
which they have faithfully fulfilled all their obli- 
gations has so thoroughly established their credit 
that their bonds stand among the best 

Means of ° 

alluring cred- securities on the market. The only 
changes that can be made in these debts 
are such as are intended to make the annual burden 
as small as possible. Some of the things desired by 
creditors, and which, while not affecting the credit 
of the borrowing State, yet add to the readiness with 
which the bonds sell, are (1) that the debt shall not 
be redeemed arbitrarily for a capital sum which 
would not yield, at the market rate of interest, the 
same annual income as the bond ; (2) that any 
chance gains that may arise, as from a fall in the 
market rate of interest, may for a time at least 
accrue definitely to the holder. 

By far the larger part of European debts consist 
of the so-called " perpetual " bonds. These bonds, 
"Perpetual" which generally name a certain capital 
bonds. sum a t w hich they may be redeemed, 

contain no date at which they mature. They are 
redeemable whenever the debtor (the State) chooses, 
subject in some instances to certain limitations for 
the greater security of the lender. For example, 
the publication of notice of intention to redeem or 
promise not to redeem for a certain period. These 
u perpetual " bonds are for both parties a very con- 



Chap, ii FORMS OF PUBLIC DEBTS 303 

venient form. What they amount to is that the 
State sells an annuity for what it will bring, with the 
privilege of redeeming it at any time for a certain 
sum, but it cannot be compelled to redeem it at any 
inconvenient time. The creditor, owing to the pub- 
lication which to-day attends all public affairs, knows 
what provisions can be made for the repayment, and 
consequently knows approximately how long his 
annuity will run. He can, moreover, easily dispose 
of it through the stock market if he should need 
the money for other purposes. 

This form was once used in the United States, but 
traditions of rapid payment led to the adoption of 
different forms. 1 The first debts of the ^ 7 , ... 

Early debts 

United States had been made in the of the United 
form of simple perpetual bonds with no a es ' 
limits. The debts created after the War of 1812 
were also of that variety, with a limit of time set 
within which it was promised not to redeem them. 
But the variation just referred to was introduced in 
1862. This form has been called the "limited 
option " debt. The bonds were " redeemable at the 
pleasure of the United States after five years, and 
payable twenty years from date " of issue. They 
were called "five-twenties." A similar plan was 
followed in the so-called " ten-forties. " The only ad- 
vantage gained by thus fixing a limit at which the 
creditor is to expect the payment, is that the fiscal 
officers may have a definite goal toward which to 
1 See Adams, Public Debts, p. 162. 



304 INTRODUCTION TO PUBLIC FINANCE part hi 

work. If a termin is set, it is easy to urge the 
extinction of the debt at or before that time, and 
consequently the adoption of special means and 
efforts toward that end. 

Sec. 5. Next in bulk are the " terminable " annu- 
ities. These may be terminable at the end of a 
Terminable certain period or at the death of the 
annuities. holder. Life annuities, both upon indi- 
vidual lives and upon the tontine plan, 1 are old 
favourites. But as forms of original loans they are 
giving way to the perpetual bonds. Life and other 
terminable annuities have the advantage of afford- 
ing an easy means of debt payment ; and in this 
respect, on account of the accurate knowledge of the 
amount to be paid, those terminating at a definite 
time are the preferable. But inasmuch as the an- 
nual payments must be larger than the interest by 
an amount calculated to equal the principal or cost 
at the termination of the period, these annuities 
impose a heavier constant burden upon the taxes. 
In the case of perpetual bonds no provision is obliga- 
torily made for amortisation, and consequently the 
fiscus has better control over the expenditure for 
this purpose. At a time of great pressure on the 
revenues the perpetual bonds offer a better means of 
raising money than the terminable annuities, inas- 

1 This plan, now made familiar again by its adaptation to life- 
insurance business, is to make over in succession to the surviving 
members of a group of annuitants the shares of the members who 
die. The last survivor gets the whole amount, until his death 
closes the account. 



chap, ii FORMS OF PUBLIC DEBTS 305 

much as they will impose a smaller burden for the 
time being. But when the difficulty is over, it is not 
infrequently the practice to turn some portion of the 
debt into the form of terminable annuities, as that 
imposes upon future officials a fixed policy of debt 
payment. The investing public finds little or no 
absolute advantage in this form, for it is relatively 
hard to save up the principal again, coming as it 
does in driblets, and the . salable value of the secur- 
ity decreases continually, so that the command over 
the remaining portion of the principal is never 
good. 

Sec. 6. Another favourite European form is that 
of lottery loans. A somewhat lower rate of interest 
on the loan is offered than would other- 

Lottery loans. 

wise be accepted, and the balance ol the 
amount is divided among the holders of the secur- 
ities on the lottery plan. Inasmuch as this is in- 
tended to appeal to the general love of gambling, the 
bonds are for small amounts, and are sold to the 
people. The plans for determining the disposition 
of the winnings of the lottery are varied. A com- 
bination of the annuity loan with the lottery loan 
is made when the State agrees to pay a certain pro- 
portion of the debt each year, the determination of 
which portion of the debt, or of which particular 
bonds, will be paid being made by drawings. 

Sec. 7. In all of these forms of debt-making the 
chief problem of the practical financier is to fix the 
rate of interest as near as possible to the market 



306 INTRODUCTION TO PUBLIC FINANCE part hi 

rate. It is best that it should not be below the 
market rate, for in that case the bonds will sell for 
Fixing the l ess than par, and the government will 
rateof interest. h ave to pay back a larger sum than it 
receives. This addition is accumulated and com- 
pounded interest, which it would, presumably, have 
been easier to pay in annual instalments than at 
one time. The amount of the discount at which the 
bonds will sell depends on the length of time that 
they have to run. 

When the market rate of interest falls, as it gen- 
erally does in time of peace, below that at which the 
debt was contracted, it is generally desirable to 
reduce the rate of interest on the debt. If, there- 
fore, the government can call in its bonds, it goes 
through the process of refunding; that is, it issues 
new bonds at the new rate of interest and pays off 
the old with the proceeds. This advantage is 
peculiar to the perpetual bonds, and is consequently 
made use of whenever the rate of interest falls, 
which fact can be ascertained from the quotations of 
the bonds on the stock market. 

Sec. 8. Perhaps next in importance to the great 
categories of debts we have been discussing are 
Debts of the those included in the classification as 
treasury. based upon specified revenues (II. A. 2). 

Of these, only those based upon the revenues of a 
definite period are common in national financiering. 
Most of the others, however, are common in local 
and municipal finances. Inasmuch as taxes are 



chap, ii FORMS OF PUBLIC DEBTS 307 

payable only at certain times of the year, generally 
only once or twice, while the expenses run on 
through the whole year, there will necessarily be 
times when the treasury owes more than it has on 
hand. Some of these debts will be bills of account; 
others will be represented by notes of various kinds 
which the treasurer uses to pay bills with or dis- 
counts to obtain money. The latter, called "ex- 
chequer bills," " treasury notes," and the like, are 
generally willingly accepted, and often pass freely 
from hand to hand. They bear interest at the low- 
est market rate. 1 They are properly regarded as 
debts of the treasury rather than debts of the gov- 
ernment, and are payable out of the next incoming 
revenues. These bills may swell to large amounts 
in times of sudden pressure on the finances, or they 
may be carelessly allowed to accumulate year by 
year, until they must be funded, or, perhaps, included 
in some general refunding or consolidation act. 

Sec. 9. Borrowing to secure the means for enter- 
ing upon some productive enterprise is the chief 
cause of the debts of local governments, productive 
Cities borrow to build water-works, to loans - 
construct street railroads, to establish a gas or light- 
ing plant, etc. In the United States the different 
commonwealths have borrowed to aid in the con- 
struction of railroads, or to establish banks. The 
enterprise in which the funds thus acquired are 

1 In 1894-95 English exchequer bills for March bore interest at 
the rate of \\ and 1 per cent. June bills, 2| and \\ per cent. 



308 INTRODUCTION TO PUB II C FINANCE part in 

invested furnishes an additional security to the 
loan, and enhances the credit of the local body, 
because it is supposed that the enterprise itself will 
yield the interest and other debt charges. There 
are two ways of managing such enterprises. One is 
by selling the commodity or service produced; the 
other is by the assessment of a fee upon the users. 
So far as the debt is concerned there is little differ- 
ence in these two methods. The former, however, 
introduces a speculative element, while the latter is 
more regular in its returns. Sometimes such enter- 
prises fail, and the interest has to be paid out of the 
revenue from taxation. Not infrequently debts are 
made of this same kind to render assistance to 
private companies, and the expectation is that the 
companies will meet the interest charges. The bulk 
of local debts the world over are of this general 
character. 

National governments, too, have sometimes con- 
tracted debts of this sort. Thus Prussia's debt was 
National in- almost all incurred for the purchase of 
vested debts, railroads, which pay the interest and pro- 
vide for the sinking fund. Other countries of 
Europe have similar " invested " debts. The United 
States has given aid to railroads, but on terms that 
give no real surety that the debt charges will ever 
be met by the roads. The wisdom of such loans 
depends solely on the wisdom of entering upon such 
enterprises. It may even be wise under certain cir- 
cumstances to advance money borrowed in this way 



chap, ii FORMS OF PUBLIC DEBTS 309 

to private companies which promise to provide 
some much-needed facilities, even without any hope 
that the interest and debt charges will he met in 
any other way than by taxation. That such debts 
when contracted should be treated in the same 
manner as any other debts, and paid as soon as pos- 
sible, is a matter of good business management, 
The failure of the assisted private enterprise to 
make good the sums expended is no reason for the 
refusal of the government to meet the obligations 
thus incurred, and refusal under such circumstances 
is as destructive of credit as would be the failure to 
meet any other obligation. 

The nature of all the remaining forms of debt is 
clear from their names in the table. A good many 
of them are merely formal in character and are 
incurred in carrying out some of the regular proc- 
esses of business or law. Such debts are never 
included in the sum total of the burden of debt, 
because the sums out of which they are to be met 
are received when the debt is contracted and re- 
tained until the debt is due. They are never, 
except in the case of the grossest mismanagement, 
a burden on the revenues. 

These different forms of debts are all in constant 
* use, and the indebtedness of any nation will show 
almost all of them. The experience of ^ system of 
the most advanced nations shows that public debts. 
there is as much need of a systematic arrangement 
of the different forms of debts as there is of the dif- 



310 INTRODUCTION TO PUBLIC FINANCE part hi 

ferent forms of taxes. The various kinds of stocks 
are adapted to the differing needs of the treasury 
and the tastes of the lenders. The former must be 
consulted, perforce; the latter, if it is desired to 
obtain the most favourable terms; hence the scope 
for the exercise of good judgment on the part of 
the fiscus in the choice of forms. 



chap, in PAYMENT OF INTEREST 311 



CHAPTER III 

NEGOTIATION, PAYMENT OF INTEREST, CONVERSION, 
AND REDEMPTION OF DEBT 

Section 1. There are practically two methods for 
the negotiation of a public loan. One is to prepare 
the bonds or other evidences of debt for _, ,. , 

livo methods 

sale, fixing all the conditions and offer- of negotiating 
ing them to all comers who will accept 
those conditions. The other is to determine the 
amount to be raised, and then to negotiate with 
bankers or capitalists or other persons in order to 
ascertain on what terms the sum can be raised. 
There are, of course, many variations of these plans, 
but these are the principal ones. In the first case 
the State loses in a measure the advantage of com- 
petition between the lenders. One of the best 
examples of this method is the so-called "popular 
subscription." For example, a State decides to issue 
a certain number of bonds at a fixed rate of interest, 
selling them to all comers at a stated price. Cer- 
tain places are designated for the reception of sub- 
scriptions. If the terms offered are too low, i.e. 
offer too little advantage to the purchasers, only a 
part of the loan will be taken up. If they are too 
high, the State, of course, suffers a loss. In this case 



312 INTRODUCTION TO PUBLIC FINANCE .part hi 

everything depends on the ability of the fiscal officers 
to gauge the market. This task is comparatively 
easy if the State already has a large number of 
stocks outstanding, the market price of which will 
roughly indicate the possible rate of interest that 
will be accepted on a public loan. But the extent 
to which the new loan will probably depress the 
market will have to be considered. 

If the second method be the one chosen, the State 
lets it be known that bids for a certain sum are 
desired. The bankers and capitalists, and sometimes 
the public at large, then compete for the privilege 
of taking either the whole issue or a part of it. 
The different bankers offer to provide the whole or 
a part of the money needed at a certain rate of 
interest, or if the face of the bonds and the rate of 
interest have been fixed, offer to buy the stocks at a 
certain rate, generally quoted as so much per hun- 
dred. The most favourable terms offered by reli- 
able bidders are then accepted, and they deliver the 
money in mass or in instalments to the treasury, in 
such form as may have been agreed upon, receiving 
in return the securities, which they are then at lib- 
erty to dispose of as they see fit. If the market 
price rises the gain goes to the capitalists, if it falls 
they lose. Of course the sums needed often exceed 
the wealth of any one person or group of persons, 
and each purchaser has to depend on his ability to 
dispose of the securities to raise the money to meet 
his agreement. 



chap, in PAYMENT OF INTEREST 313 

In both of these cases various secondary considera- 
tions as to the form of the loan, the length of time 
it has to run, etc., affect the result. Sometimes 
it has been deemed wise to combine the two 
methods. That is, to negotiate with the bankers for 
terms on a part of the debt, and then to offer an- 
other part on similar terms to popular subscription, 
or even to allow of more general competition as to 
the terms. 

Sec. 2. The amount of the interest or the rate is 
the chief factor in the negotiation of a debt ; but the 
place and times of payment and the kind pi ace o/pay- 
of money in which payment will be made ment of inter- 

est, and minor 

are minor considerations 01 considerable considera- 
weight. So, also, is the size of the bonds. tions - 
In the case of popular loans which are intended to 
be subscribed for by the mass of the people, the 
bonds must be for small amounts ; in other cases the 
units are larger. There is no uniformity in this 
matter. The larger the bonds can be made, the 
easier it is for the treasury to manage the debt. Of 
some importance too is the choice between bonds 
that are payable to the holder, or to certain persons 
by name, and those payable to persons registered on 
the books of the State. If the bonds are payable to 
the holder there is no need of a record of the holders 
by the government. The government is also spared 
the trouble and expense of recording changes in 
ownership. But there is an advantage of greater 
safety to the holders in the case of the recorded 



314 INTRODUCTION TO PUBLIC FINANCE part hi 

bonds, which are thus ensured against loss or 
theft. 

It is in general customary to determine the place 
at which the interest, etc., will be paid. This is 
frequently some important commercial centre, some- 
„ . . times the treasury of the State. If in 

Payment in J 

some commer- the country issuing the bonds there be 
in circulation a debased, redundant, or 
depreciating currency, it is often agreed to pay 
the interest in some foreign commercial centre, or 
in foreign money, in order to secure payment in 
a stable currency. Thus many of the common- 
wealths of the United States which contracted debts 
between 1830 and 1850, agreed to pay the interest in 
London in order to ensure the payment in gold, and 
to guard their creditors against loss from the depreci- 
ated currency then in circulation. When the States 
appealed to Congress for assistance in the payment 
of their debts in 1842, 1 this was alleged as a feature 
involving special hardship. A large part of Russia's 
debt is payable in Holland and England, and in all 
of it the kind of money is specified. The same is 
true of the debts of many other countries. 

Sec. 3. While it is often necessary, in order to 
Conversion of obtain the required funds on the best 
the debt. terms, to offer many different forms of 

public securities, yet in a time of absence of press- 

1 See Johnson, Beport on the Belief of the States, 27th Con., 3d 
Sess., House, No. 296 ; a perfect mine of information on the 
history of public debts in the United States up to 1842. 



CHAP. Ill 



CONVERSION 315 



ure it may become desirable to simplify these forms 
and to consolidate the debt. This involves the calling 
in of the outstanding paper and its conversion into 
another form. Conversion is generally undertaken 
when a fall in the rate of interest offers the State an 
opportunity to gain by the process. The reduction 
of the rate of interest is possible whenever the State 
enjoys the privilege of repayment. It can then 
offer the creditor the choice of payment (for which 
it could obtain the money by the sale of new bonds 
at the new rate of interest) or of new securities at 
the lower rate. This mode of conversion or reduc- 
tion of interest is, of course, perfectly legitimate. 
The reduction of the rate arbitrarily without the 
consent of the creditors is as much repudiation as 
the refusal to pay altogether. It is by numerous 
conversions and consolidations that the rate of inter- 
est on the bulk of the debt of Great Britain has been 
reduced as low as 2-| per cent. 

Sec. 4. The best justification of debt-making is 
that it distributes the burden of some heavy ex- 
penses upon a later period. The cost of this post- 
ponement is the payment of the annual interest. In 
order to fulfil the intention of the loan Debts must be 
and to get rid of the cost of the process P aid - 
it is necessary to pay the debt. If these two reasons 
were not sufficient, the danger of the recurrence 
of similar extraordinary needs and new appeals to 
credit, and the eventual danger of bankruptcy, 
point in the same direction. As we have already 



316 INTRODUCTION TO PUB II C FINANCE part in 

seen, some of the forms of debts contain within 
themselves the provision for payment. Life and 
terminable annuities involve the payment of the 
principal in annual instalments. Other forms call 
for payment in larger instalments or at a definite 
termin, for which provision must be made by the 
collection of funds beforehand. If, however, the 
expiration of the period finds the debtor State 
not in the possession of the funds needed, it may 
have to borrow again to fulfil its agreements. In 
the case of most perpetual debts it would be obvi- 
ously unfair to call upon certain holders for the 
surrender of their bonds and to allow other holders 
of the same sort of bonds to retain theirs, espe- 
cially if the rate of redemption is below the market 
rate. The whole of any issue of bonds, therefore, 
must be treated as a unit. This involves the grad- 
ual accumulation of a fund for the payment of all 
of the debt of the same kind and issue. There is, 
however, another alternative. The government may 
enter the market with this fund, before it is large 
enough to pay all the debt, and purchase such of 
its securities as are offered for sale. Care must be 
exercised in the application of this method not to 
raise the price of the securities. 
The sinking Provision made for the accumulation 

fund. f a fund for the redemption of the 

debt is called the sinking fund. 1 The sinking fund 

1 See Ross, "Sinking Funds," Pub. Amer. Economic Assoc, 
VII., p. 445. 



chap, in REDEMPTION OF DEB T 31 T 

may be defined in two ways ; either it is an an- 
nual fund, i.e. a portion of the annual income, or it is 
the accumulated capital from this and other sources 
applicable to the payment of the debt. Not strictly 
the earliest, but the first important attempt at the 
arrangement of a regular sinking fund is that of 
England in 1786 under Pitt. This was a remark- 
able scheme. It is said to have been suggested by 
Price, a clergyman, who in 1772 wrote An Appeal 
to the Public on the Subject of the National Debt. 
His argument was based on the productiveness of 
compound interest. He urged that a fixed sum, 
however small, should be set aside every year for 
the purchase of public stock, and that the interest 
on the stock thus purchased should continue and 
should be applied to further purchases. There 
would then be two sources from which the debt 
would be cancelled: one, the payment of the annual 
amount ; the other, the ever increasing interest fund. 
The effect of such a scheme in eventually discharg- 
ing any debt was regarded as almost magical. It 
was not perceived that the real efficacy of the scheme 
lay in the fact that the nation continued to bear the 
whole burden of the initial interest charge until the 
debt was paid, and that the real source of payment 
was the excess of taxation over expenditure. In 
accord with this idea Pitt appointed a pat's sinking 
"Board of Commissioners of the Sink- fund. 
ing Fund," who were to receive a fixed sum each 
year, with which to purchase public stocks, at or 



318 INTRODUCTION TO PUBLIC FINANCE part hi 

below par. Interest on the stocks thus purchased 
was to be paid to the commissioners, and quarterly 
applied to new purchases. This much-admired 
scheme amounted to adding £1,000,000 annually 
to the taxes needed for other purposes, and con- 
tinuing the entire burden of taxation until the 
debt was paid. It is clear that what was really 
used for debt payment was the surplus revenue. 
The X 1,000,000 was clearly that, and the interest 
on the stocks purchased therewith need not have 
been paid but for the sinking fund. There is, in- 
deed, no source from which the debt can be paid 
but taxation or similar net revenue. So great was 
the faith of the government in this scheme that it 
continued the payments to the sinking fund even 
while borrowing for the war of 1793 and after. 
The fallacy of Dr. Price's arguments was pointed out 
by Professor Robert Hamilton of Aberdeen in 1813. 
Shortly after that, it was estimated that, as a result 
of the sinking fund system kept up during a period 
of borrowing, the government had, between 1785 to 
1829, borrowed £ 330,000,000 at 5 per cent to pay 
a debt of the same size at 4|- per cent. The scheme 
was then abandoned, never to be resumed. From 
this time on only genuine surpluses were applied 
to the payment of the debt. This abandonment 
of the idea of Price and Pitt, however, had a rather 
disastrous result, in that it largely suspended debt 
payment in favour of tax remission. Since 1875 
England has tried a new plan. Without commit- 



chap, in REDEMPTION OF DEBT 319 

ting herself to a policy which would involve paying 
debts with one hand and borrowing with the other, 
and without relying upon mere chance T he new siw ^._ 
surpluses, she decided to appropriate in fffund. 
a fixed sum from the consolidated fund for the 
national debt services, to be continued as long as 
there were no extraordinary calls upon the funds. 
£25,000,000 are now annually appropriated for the 
national debt services, of which, in 1895, £1,718,263 
3s. Id. went into the new sinking fund ; whereas in 
1875 the sum was fixed at £28,000,000, and a larger 
amount Avent into the sinking fund. In addition 
to this England has been converting her debt into 
terminable annuities, resulting in a mechanical 
method of debt payment which may in time of 
pressure work as the old sinking fund did. 

Sec. 5. The American system of debt paying be- 
gan in 1790 with the application of a surplus from 
tunnaofe fees and imports to the purchase , 

° r r American sys- 

of public bonds in order partly to im- temso/debt 
prove the market price of the bonds and paymen 
facilitate conversion. In 1792 the bonds thus pur- 
chased were made the basis of a sinking fund, it 
beinof determined that the interest on them should 
continue and be paid to a commission for the fur- 
ther purchase of public bonds. In 1795 the sinking 
fund commissioners were made the recipients of cer- 
tain revenues to be applied to the payment of defi- 
nite portions of the debt. Ross thus summarises 
this fund : " The sinking fund was now enlarged by 



320 INTRODUCTION TO PUBLIC FINANCE part in 

the following additional appropriations: (1) so 
much of the permanent duties as, with existing 
income, should enable the commissioners to pay, in 
1796 and thereafter, a yearly 2 per cent of the 
6 per cent stock; (2) the surplus dividends on 
the government $2,000,000 of United States Bank 
stock after deducting the interest accruing on the 
remnant of the bank loan; (3) so much of the per- 
manent duties as, with the surplus dividends, should 
suffice to pay a yearly 1200,000 on the bank loan, 
till 1802, and then begin the redemption of the 
deferred stock; (4) the proceeds of the sale of 
public lands; (5) the proceeds of debts inherited 
from the old government; (6) all revenue sur- 
pluses of any year remaining unappropriated during 
the next session of Congress." 1 This fund was not 
very efficient on account of the excess of expendi- 
tures. It served one very important purpose, how- 
ever, that of regulating the credit of the United 
States by showing the intention to pay. In 1802 
Gallatin organised another plan, which was continued 
for some time. It was to increase the revenues 
beyond the current expenditures and apply the 
surpluses to the debt payment. The results of the 
two plans have been compared as follows : " The 
inherited debt and accrued interest amounted in 
1791, when funded, to 176,781,953.14. The Feder- 
alists in ten years reduced this to $72,733,599, but 
added 17,193,400 of new stock, mostly at 8 per 
i " Sinking Funds," p. 49. 



chap, in REDEMPTION OF DEBT 321 

cent, thus bequeathing a burden of 179,926,999 to 
their successors. Of this, Gallatin's sinking fund 
extinguished $46,022,810 between 1801 and 1811. 
The purchase of Louisiana, however, added $11,250,- 
000 to the principal, so that on January 1, 1812, the 
public debt was $45,154,189, over thirty-one mill- 
ions less than the original Revolutionary debt." 1 
This comparison is not altogether fair to Hamilton, 
the author of the older plan, for his fund enabled 
important conversions to be successfully made which 
reduced the debt charges. During the War of 1812 
the payments to the sinking fund were suspended. 
After the war the debt stood : 

Old debt remaining .... $39,905,183.66 

Funded war debt .... 49,780,322.13 

Treasury notes 18,452,800.00 

Temporary loans .... 550,900.00 

Total burden on the sinking fund $108,689,205.79 

The sinking fund was at that time composed of 

Interest on stock held by com. . . $1,969,577.64 
Receipts from public lands . . . 800,000.00 

From duties 5,230,422.36 



Sinking fund .... $8,000,000.00 2 

The policy of protection, inaugurated after the War 
of 1812, separated income from expenditure. The 
ultimate purpose of most of the taxation, namely 
protection, was considered so paramount that a high 

1 Ross, p. 67. 

2 Ross, p. 69, from Finance, Vol. II., p. 916. 



322 INTRODUCTION TO PUBLIC FINANCE part hi 

rate of taxation was continued for that reason. 
The available surpluses were, therefore, large, and 
were from time to time applied to the debt. Down 
to 1824, when all the debt contracted up to that 
time was practically paid, the sinking fund was 
managed by a special commission, but since then 
the secretary of the treasury has had charge of it. 
The Civil War debt was by the act of February 25, 
„. 7 . , , 1862, supposedly placed on a secure 

Sinking fund ' *■*■ J r 

of the Civil basis. " The coin paid for duties on im- 
ports was to be applied first to the pay- 
ment of interest on the bonds and notes of the 
United States. It was then to be applied 4 to the 
purchase or payment of 1 per cent of the entire 
debt . . . to be made within each fiscal year, which is 
to be set apart as a sinking fund, and the interest of 
which shall in like manner be applied.' . . . The 
residue of customs receipts was to be paid into the 
treasury." 1 While no such regularity as was con- 
templated by this act was realised, yet the debt has 
been paid from surpluses more rapidly than was 
anticipated, until the reduction of the revenues in 
1895, due to a change in the policy in regard to the 
protective duties, together with a redundancy in the 
monetary circulation, which resulted in a foreign 
drain upon the gold reserves held for the redemp- 
tion of notes outstanding, made new borrowing 
necessary. 

The commonwealth constitutions of the United 
1 Ross, p. 79. 



chap, in REDEMPTION OF DEBT 323 

States very generally charge upon the legislatures 
the duty of providing a sinking fund. Many of 
them, besides limiting the amount of ~ 

' & Common- 

debt that may be created, either by wealth sink- 

naming a fixed sum or a proportion of ing J un s - 
the revenues that may be used for interest payment, 
also provide that whenever a debt shall be con- 
tracted, a tax shall at the same time be levied suffi- 
ciently large to pay the interest charge and provide 
a sinking fund. The general distrust of the legis- 
latures is emphasised in the constitutions by making 
such laws irrepealable until the debt is paid. The 
commonwealths are thus permanently committed to 
the policy of debt payment, not so much on account 
of any deep-seated belief in the efficacy of the par- 
ticular methods laid down, which may necessitate the 
continuance of debt payment even at a time of 
borrowing, but on account of the well-founded dis- 
trust of the prudence of the legislatures. The same 
distrust has destroyed the danger of the system, by 
almost entirely forbidding debt-making by the com- 
monwealths. 1 

Sec. 6. In conclusion, it would seem that the 
experience of great nations shows : that debts must 
be paid ; that they can be paid only by increased 
taxation ; and that the possible weight of taxation 

1 For a full account of the debt policy of the American com- 
monwealths see my monograph, Das Kreditwesen der Staaten und 
Stadte der Nordamerkanischen Union in seiner historischen Ent- 
wickelung, Jena, 1891. 



324 INTRODUCTION TO PUBLIC FINANCE part hi 

for this purpose is determined by a consideration 
(1) of the length of time it is thought desirable 
that the debt shall run, (2) of the existing burden 
of taxation, (3) of the general conditions of the 
people. When the debt has been contracted for 
some productive purpose it seems fitting that the 
surplus earnings of such an enterprise should go to 
debt payment, as this eventually enables a perma- 
nent lowering of the cost of such services to the 
people. 



PART IV 

FINANCIAL ADMINISTRATION 



CHAPTER I 

THE BUDGET; ADMINISTRATION OF EXPENDITURE; 
CONTROL AND AUDIT 

Section 1. To the fourth and last part of our 
subject belong the formal arrangements of the public 
finances, — the preparation and ratification of the 
budget, the care and preservation of the public 
funds, the administration and control of expendi- 
tures, and the collection of the revenues. It was 
this side of the subject that first attracted attention 
and which occupied a large part of the writings of 
the Cameralists. Lorenz von Stein gives a very con- 
siderable portion of his monumental work to these 
subjects, and the able French writer, Stourm, has de- 
voted to financial legislation a volume entitled Le 
Budget. English and American economists have 
generally left this field to the jurists and publicists, 
but Bastable devotes the last three chapters of his 
book to some of these topics. 

325 



326 INTRODUCTION TO PUBIIC FINANCE part iv 

In every well-regulated household and every 
business concern the keeping of accurate accounts, 
Theimpor- the distribution of the funds among 
tance of cor- different persons, and the control of 

red methods 

of fiscal ad- expenses have an importance second 
ministration. on iy to the broader questions of policy. 
Equally important in the greater housekeeping of 
the State are the formal arrangements for the enact- 
ment of fiscal laws, for the keeping of accounts, and 
for ensuring compliance with the laws. 

The general frame of the fiscal administration, 
the relation between the various departments, the 
assignment of particular powers and duties to the 
different officials or bodies, depends entirely upon 
the general political organisation. How these feat- 
ures differ from country to country it is the prov- 
ince of Political Science to describe. But the frame 
of administration has an effect on the finances ; and 
there are certain principles demanded by sound 
finance, which are followed by every country, no 
matter what its frame of government. Hence, there 
is no excuse for omitting this part of the subject. 

Sec. 2. Of necessity the methods of accounting 
and control do not assume a public character until 
„.. . .„ there is a pretty clearly recognised popu- 

History offis- r j j & r r 

caiadminis- lar interest in the affairs of the State. 
At one time the Roman treasury under 
the. control of the Censors and in charge of the 
Qucestors exhibited the features of public economy. 
But under the Empire the public treasury and the 



chap. I THE BUDGET 827 

private treasury of the Caesars gradually merged into 
a single one, and the methods of accounting became 
that of private rather than of civic housekeeping. 

The middle ages were essentially unpolitical, and 
in that period no system of public treasuries proper 
ivas developed, except in the free cities. As we 
have already seen, there were no revenues collected 
in the monarchies for a distinctly public purpose 
until the fifteenth and sixteenth centuries, and con- 
sequently there could be no public accounts or pub- 
lic control over the funds. 

The constant struggle between the representatives 
of the people and the officers of the older abso- 
lute governments for the control of the ri „. , , , 

o Conflict aevel- 

purse led to the development of distinct ops legislative 
methods of accounting and control. The 
most striking feature of the modern systems in 
European countries is the establishment of the bud- 
get, and of the right of the popular representatives 
to vote taxes and appropriations. In America the 
right of the legislatures to control the finances was 
clearly established at a very early date, and little 
or no advance has been made beyond the crude 
methods first developed. Most European countries 
have advanced more rapidly and perfected far better 
systems. This higher development of the budget in 
European constitutional governments is explained 
by the constant conflict between the branches of the 
government having interests which are theoretically 
opposed. The modern budget is an outgrowth of 



328 INTRODUCTION TO PUBLIC FINANCE part iv 

the gradual assumption of power by the legislatures, 
and the corresponding loss of power by the execu- 
_, . tives. The latter have had to ask for 

Europe in 

advance of funds, and the former in granting them 
have insisted upon knowing what they are 
to be used for, and upon having assurance that they 
will not be applied in any other way. In the United 
States, however, both the federal and the common- 
wealth legislatures suggest, or initiate, financial legis- 
lation as well as grant funds. Both of these func- 
tions of initiation and of grant being in the same 
hands, there is no conflict of interests such as has 
developed the systems of financial statements and 
legislative control in Europe. The only care in 
this country is to see that the funds are not appro- 
priated to private purposes, while in Europe there 
is the desire to prevent the application of the funds 
to other public purposes than the ones specified. 

Sec. 3. It has been claimed that the English sys- 
tem served as a model for the other European coun- 
,, , . .. tries. However that may be, and it is 

Making up the J 

English true only in part, the English system 

u ge " will serve as a good illustration of the 

European methods. The fiscal year begins April 1 
and ends March 31. Each department of the ad- 
ministration prepares a careful statement, known 
as the " Estimates," for the coming year. These 
" Estimates," each of which comprises a good-sized 
quarto volume, are tediously exact and minute in 
the statement of what it is expected will be needed 



chap, i THE BUDGET 329 

for the forthcoming year. They are called the 
" Army Estimates," the " Navy Estimates," the 
" Civil Service Estimates," etc. The The "Esti- 
Chancellor of the Exchequer, in turn, mate s-" 
bases his estimate of all that will be needed upon 
these statements, and calculates the receipts from 
each source on the basis of the revenues of the 
previous year. He then presents all the documents 
to Parliament with a brief, clear statement of what 
the expenditure will be, what it is expected the 
revenues will be, what new taxes, if any, are needed, 
or what taxes may be remitted or changed, in order 
to make the revenues equal the expenditure. This 
statement is called the budget. " Usually, but by no 
means always, the proposals of the Chancellor of the 
Exchequer are accepted by the Commons, and even 
when they are not in detail it is seldom that the 
items of expenditure are objected to. The House is 
supposed to go through the 4 estimates ' in detail ; 
it forms itself into a 4 Committee of 

The " votes." 

Supply,' and sanctions every item in the 
three bulky volumes, but its members have not, as a 
rule, knowledge enough of the details to offer effec- 
tive criticism, and the utmost the committee can be 
said to do, on the average, is to render flagrant 
abuses impossible. On the average, perhaps that is 
enough." 1 Parliament cannot directly or indirectly 
increase the appropriations asked by the ministry in 
the name of the Crown, nor add new appropriations. 
1 Wilson, The National Budget, p. 147. 



330 INTRODUCTION TO PUBLIC FINANCE part iv 

The estimates both of revenues and expenditure are 
made with such great care that there is seldom either 
a surplus or a deficit of any large amount at the end 
of the year. According to Bastable the estimates of 
expenditure in England for the three years April 1, 
1889, to March 31, 1892, as compared with the re- 
sults, show an error of only £137,000 in a total of 
£264,000,000, or a little over Is. per £100, or $1 in 
Smaiinessof 12000. All credits of disbursing offi- 
errors. cers expire, and their accounts close, 

March 31. All appropriations lapse at that time, 
except those appropriated for the consolidated fund. 
It requires a special act of Parliament to spend 
any more money on last year's account even though 
the original appropriation may not have been ex- 
hausted. 

In the United States there is no connection be- 
tween the executive and legislative departments of 
the government that would allow of any such ar- 
rangement as that of the budget in England. The 
reports of the administrative officers, the President, 
and the Secretary of the Treasury, are made to Con- 
gress and are often accompanied by suggestions of 
various sorts. But the executive officers have no 
real access to the ear of the House. Therefore, no 
Congressional formal budget is presented to Congress. 
financiering. Two separate committees in the House 
(where finance bills originate, although they may be 
amended by the Senate) deal regularly with finances; 
one with taxation, the other with appropriations. 



chap, i THE BUDGET 331 

These committees are the " Committee on Ways and 
Means" and the " Committee on Appropriations."' 
Bills involving expenditure or taxation are regu- 
larly referred to these committees. The control of 
these committees rests solely on convention, there 
being no constitutional provision for such reference. 
Even after the committee has presented an appro- 
priation or revenue bill, there is the greatest freedom 
of amendment, and theoretically any member of the 
House could, if so inclined, present an entire new 
set of such bills forming a budget. Appropriations 
may be increased or decreased, or new ones intro- 
duced, without reference to the committees. Prac- 
tically the control of these committees is very great, 
especially in the matter of suppressing appropria- 
tion bills that may be referred to them for considera- 
tion. Certain lines of expenditure may be suggested 
by other committees, and theoretically may be voted 
on without reference to these controlling committees. 
For example, the Navy and War departments may 
receive appropriations suggested by the committees 
in charge of them. Many other committees, as, 
for example, the ones on claims, on invalid pensions, 
pensions, etc., regularly bring in bills involving 
expenditure. 

Ever since the protective policy was fully estab- 
lished the government has been in Revenue laivs 
the possession of large revenues, which s ^ n ere 

r ° from appro- 

are not determined in any way by the priations. 
expenditures. So that the consideration of rev- 



332 INTRODUCTION TO PUBLIC FINANCE part iv 

enue bills has always been complicated by other 
than fiscal considerations, except during the Civil 
War. This sundering of the functions of spending 
and of obtaining revenues, and the general scatter- 
ing of appropriations, would apparently cause the 
utmost confusion. But the result is not so bad as 
might be expected, (1) because of the influence of 
the committees, (2) because, of course, some attempt 
is made by the House itself to ascertain whether 
funds are or will be available for the purposes sug- 
gested, (3) because the tax system has not been a 
variable one, and has yielded, until recently, a pretty 
regular and gradually increasing revenue, to spend 
which has often taxed to the utmost the ingenuity 
of Congress. But the system absolutely prevents 
any systematic oversight of the finances as a whole, 
and allows of no measurement of the relative weight 
of each appropriation. Credits to spending officers 
do not expire at the end of the fiscal year, July 1, 
as in England, but generally continue in force until 
the entire sum is consumed or the object is accom- 
plished. Congress thus loses one advantage for the 
control of expenditure that Parliament enjoys. The 
American system, however, has one great advantage 
over the English in that it allows of a more critical 
investigation by the legislature of the specific items 
of each appropriation. 

The fiscal The date at which the fiscal year ex- 

y ear - pires is generally set with reference to 

the convenience of officials in rendering their reports 



chap. I CONTROL AND AUDIT 333 

and to the meetings of the legislatures. The ac- 
counts presented are generally for gross income and 
expenditure, so that the details of the cost of col- 
lecting revenues and chance savings of expenditures 
can be controlled. 

There is theoretically no sanction for expenditure 
of any kind beyond the amount appropriated by the 
legislature. If any expenditure not so Deficiency 
sanctioned is of pressing necessity, the biUs - 
administrative officers may sometimes assume the 
responsibility and make the appropriation, subject 
to the ratification of the legislature when it next 
meets. This discretionary power is exercised to a 
very limited extent in most countries. In the 
United States, however, the disorder attendant upon 
the appropriations involves the annual presentation 
of a ''deficiency bill." When any action involving 
expenditure has been sanctioned by the legislature, 
and insufficient funds have been appropriated, there 
is a moral obligation resting on the legislature to 
make the requisite appropriation afterward. 

Sec. 4. When the budget has been prepared and 
voted, the next step is to see that the expenditure is 
carried out as authorised and to prevent any mis- 
appropriation of the funds. In England English con- 
the funds are deposited with the Bank of Poland audit. 
England, subject to the order of the Comptroller and 
Auditor General only. This officer's duties are a 
combination of those of the old Board of Audit 
created by Pitt in 1785 with those of the Ex- 



334 INTRODUCTION TO PUBLIC FINANCE part iv 

chequer, and date from 1866. No payment is made 
without (1) an Act of Parliament, (2) a requisition 
by the Treasury 1 issued to the Comptroller General, 
(3) a grant of credit for the amount authorised by 
the Act good for one year, (4) a Treasury order 
directing the transfer of the money to the Pay- 
master General of the Service. 2 As the esti- 
mates have been closely scrutinised, there is little 
opportunity for the misapplication of funds. There 
is none whatever for over-draft. Again, after the 
expenditure has been made, the accounts with 
vouchers are passed through the Comptroller's office 
for his approval, or audit. The report of that 
officer is subjected to the final revision of the Par- 
liamentary Committee of Public Accounts. Thus 
the whole process begins and ends with Parliament. 
It will be seen that there are really two parts to 
the process. First, the control over the "issues" 
to the disbursing officers, that is, over the placing 
of the public moneys in their hands. Secondly, 
the audit of the accounts after the expenditures 
have been made. 

Sec. 5. In the United States, 3 the direct control 
of the money is in the hands of the executive 
officers, subject to the orders of Congress. The 
safeguards consist in making the processes of ex- 

1 See Wilson, The State, pp. 696-698. 

2 Cf. Bastable, p. 705. 

3 See Renick and Thompson, Political Science Quarterly, VI., 
248-281, and VII., 468-482. 



chap. I CONTROL AND AUDIT 335 

penditure complicated and subjecting each item to 
the scrutiny of several sets of executive officers. 
The idea of the original plan in the Original plan 
United States was not to allow of issues °f c ™ troland 

audit in the 

to the regular disbursing officers, but to United states. 
control expenditure by a careful scrutiny of the 
accounts or claims rendered. The Treasury was 
to be reached only after the claims had been cut 
down to the lowest possible figure. Claims against 
the government were first passed upon by an au- 
ditor, then by a comptroller, either of whom might 
reject them. Then the Secretary drew a warrant 
upon the Treasurer, and that warrant was recorded 
by the Register and countersigned by the Comp- 
troller. Hamilton found it necessary, for the sake 
of economy, to pay cash for many things needed 
by the government, and hence this original plan 
broke down. Issues were made to disbursing offi- 
cers, and the necessary warrants were drawn for 
each particular item of expenditure, afterward, in 
order to legalise the transaction. 

For many years the United States had a very com- 
plicated system of audit, control, and record. There 
were six Auditors, so called, and the „,, JT 

The recently 

" Commissioner of the General Land abandoned 
Office," who was Auditor for the lands p an " • 
account. Then there were three Comptrollers, known 
as the First and Second Comptrollers, and the Com- 
missioner of the Customs. Lastly there was the 
Register. All of these were assisted by a large body 



336 INTRODUCTION TO PUBLIC FINANCE part iv 

of clerks. These offices were organised into four co- 
ordinate branches, with separate jurisdiction. Ac- 
counts were first examined and passed upon by an 
Auditor, then re-examined by a Comptroller. Claims 
disallowed by these officers could be pushed in the 
Court of Claims and appealed from there to the Su- 
preme Court. The assignment of accounts to the 
different Auditors and Comptrollers was almost 
arbitrary and with little system. The First Auditor 
looked over the general income and expense accounts 
of the Treasury, the special accounts of the customs 
receipts, the expenditures for the legislative and 
executive departments, special accounts of the Treas- 
ury department, — as of the interstate commerce 
commission, of the public debt, of engraving and 
printing, of the coast and geodetic survey, of the 
life-saving service, of the lighthouse establishment, 
of the public buildings, of the government of ter- 
ritories, of the District of Columbia, of the central 
administrative departments of War, Navy, the In- 
terior, etc., of the departments of Labour and of 
Agriculture, and all the expenditure for the Judi- 
ciary. The Second Auditor had the accounts from 
the Indian Service and the Army. The Third 
Auditor had the pension account. The Fourth had 
the accounts of the Navy. The Fifth looked over 
the accounts of the Collector of the Internal Rev- 
enues. The Sixth was for the postal accounts. 
The First Comptroller then revised the accounts 
that were assigned to the First and Fifth Audi- 



chap. I CONTROL AND AUDIT 337 

tors, except the Customs account, for which the 
Commissioner of the Customs was Comptroller, and 
those of the Commissioner of the General Land 
Office. The Second Comptroller had the accounts 
of the Second, Third, and Fourth Auditors. 

All of this has recently been changed. " The act 
of July 31, 1894, making appropriations for the 
legislative, executive, and "judicial ex- ~, 

» ' 'J The present 

penses of the Government for the fiscal plan of audit 
year ending June 30, 1895, altered the andcontroL 
accounting offices of the Treasury and changed 
materially the system of accounting. The detail 
revision of accounts here to fore made by the First 
Comptroller, as well as by the Second Comptroller 
and the Commissioner of Customs, is abolished, as 
are the offices of the Second Comptroller and the 
Commissioner of Customs, the First Comptroller be- 
ing made the sole Comptroller of the Treasury. A 
revision of accounts under the new system will only 
be made when either the head of a Department or the 
claimant is dissatisfied with the settlement of an ac- 
count by an Auditor, or when the Comptroller him- 
self has reason to believe that any particular account 
ought to be subjected to a second revision. Much 
labour will be saved by this system, and the adjust- 
ment of accounts ought to be greatly expedited. It 
is believed this will be accomplished without danger 
of mistake or loss to the government. It is one of 
the duties of the First Comptroller to ' countersign 
all warrants drawn by the Secretary of the Treasury 



338 INTRODUCTION TO PUB II C FINANCE part iv 

which shall be warranted by law.' This duty will 
continue with the Comptroller of the Treasury under 
the new system. As the Secretary of the Treasury 
has the duty devolved upon him of originating war- 
rants, and as all such warrants must be counter- 
signed by the Comptroller, no warrant finally becomes 
effective without their concurrent action." 1 

There are now six Auditors: (1) for the Treas- 
ury Department, (2) for the War, (3) for the 
Interior, (4) for the Navy, (5) for the State, etc., 
(6) for the Post Office. The accounts are still dis- 
tributed in the old arbitrary unsystematic fashion 
among the different Auditors according to the illog- 
ical scheme by which the different duties are 
divided among the Departments. 2 It is hard to see 
how this can be bettered until the work of the 
Departments is rearranged. The recent change is 
a great gain in the direction of simplicity and speed. 
The Auditor's work stands unless appealed to the 
Comptroller, and is no longer necessarily gone over 
again by a comptroller. 

The Register keeps ledger accounts with all 
appropriations made by Congress, and also keeps all 
The Register's the personal disbursement and receipt 
°-ffl ce - accounts pertaining to the customs, in- 

ternal revenue, diplomatic, treasury, judiciary, inte- 
rior, civil services, and the public debt. General 
receipt and expenditure ledgers have been kept 

1 Finance Report, 1894, pp. 836, 837. 

2 See Wilson, The State, pp. 567-570. 



chap, i CONTROL AND AUDIT 339 

running from the foundation of the government. 
The Register furnishes to the proper accounting 
officers copies of all warrants covering proceeds of 
government property, where the same may be nec- 
essary in the settlement of accounts in their re- 
spective offices. He also furnishes certificates of 
balances, advances, and repayments to the offices 
of the First and Fifth Auditors, for settlements of 
accounts, and certifies to the First Comptroller, on 
requisitions for advances, the net indebtedness of 
disbursing agents as shown by the ledgers. 1 The 
Treasury Department itself exercises a pretty ex- 
tensive supervision over expenditures. 

1 Finance Beport, 1894, p. 737. 



340 INTRODUCTION TO PUBLIC FINANCE part iv 



CHAPTER II 

COLLECTION OF THE REVENUES, CUSTODY OF THE 
FUNDS, AND THE PUBLIC ACCOUNTS 

Section 1. Under the early methods of collecting 
revenues, the tribute due, the economic receipts, and 
the voluntary contributions were delivered directly 
to the chief or leader. Many of the early direct 
taxes were similarly treated. Indirect taxes upon 
commodities and transactions could not be managed 
in this way. The first crude method of dealing 
p 7 ,i, * with these taxes was that of the tax- 

Early methods 

of collecting farmer, the Roman Publican. He pur- 
chased for a price the privilege of col- 
lecting all of certain kinds of taxes that he could 
obtain. The same method was extended to other 
taxes where there was no similar necessity for it. 
This farming of taxes was used through the imperial 
era of ancient Rome, and copied by France it was 
extended into modern times. The various direct 
contributions of the middle ages which were ap- 
portioned among the different cities, or " estates," 
were frequently delivered directly to the Prince or 
his Treasurer. All of these crude methods were 
abandoned as soon as there was a distinct recogni- 
tion of the authority of the taxing power over all 



chap, ii COLLECTION 341 

the different parts of the country and over each 
contributor individually. The apportionment sys- 
tem, as originally used, was a more or less distinct 
recognition of the autonomy, and possibly of the 
partial political independence, of the tax-payers, be 
they provinces, cities, or classes of individuals. 

Sec. 2. The collection of the taxes is usually 
the duty of the regular fiscal officers of the general 
administration, but industrial and commercial re- 
ceipts are frequently collected by special boards in 
charge of them, who turn the money over to the 
Treasury. Assessment and collection are so closely 
connected that they can be studied together. In 
the collection of customs duties there are two things 
for the officials to care for. (1) They must look 
out for the arrival of all the taxable „ „ .. 

Collection of 

commodities and prevent smuggling, customs 
(2) They must ascertain the value of duties ' 
the goods if the taxes are ad valorem, and the num- 
ber of pieces if specific. The invoices, supported by 
the usual certificates, oaths, etc., are of the nature of 
a declaration by the owner, or importer. They are 
then subjected to the scrutiny of official appraisers, 
whose knowledge of the nature and value of the 
goods is very accurate. The tax is then paid to the 
collector at the place of importation or when it 
reaches the recipient in the interior, but before it 
is delivered to him. In case the goods are to be 
admitted into the interior of the country, or of the 
customs district, before the tax is paid, as is the 



342 INTRODUCTION TO PUBLIC FINANCE fart iv 

case when the person to whom the goods are sent 
resides in the interior, the package is sealed up, or 
"bonded," and the seals can only be broken by an 
authorised collector after the payment of the tax. 
In countries where there are no general tax collec- 
tors in the interior, this method is not feasible, and 
the goods are held in the custom-house on the 
boundary until the tax is paid. With a few excep- 
tions this is the practice of the United States. But 
in Germany, where there are regular fiscal officers 
of the central government in almost every hamlet, 
goods are regularly shipped to the consignee, and 
the tax paid in the interior. 

In the case of excises, the factories, breweries, 
fields, and other places where the taxed goods are 
Collection of produced are subject to regular inspec- 
excises. tions and are more or less under the con- 

stant supervision of the officials. The tax is 
collected directly from the producer or by the sale 
of stamps and licenses. 

Sec. 3. In the case of direct taxes it is the assess- 
ment that is the most difficult part of the process. 
Assessment of The methods of assessing some of the 
direct taxes, taxes have already been suggested. The 
work consists of two parts. (1) It is necessary to 
ascertain the base — the persons, the property, or the 
revenues subject to taxation. (2) It is then neces- 
sary to fix upon the valuation, or the rating of the 
base in each particular case. The latter part of 
the process is "making the assessment." In this the 



chap, ii COLLECTION 343 

contributor may be called upon to assist, or the 
officers of the government may proceed entirely 
alone. Generally a declaration is requested, or may 
be required, from the tax-payer, and the officials then 
investigate the truth of that declaration. In Europe 
it is customary to form assessment commissions con- 
sisting of representatives of the tax -payers in the 
district, who are acquainted with the local con- 
ditions and act with the officers of the government. 
These commissions help the regular officers of the 
fiscus to make the assessment, or sit as a sort of 
court to hear appeals from the assessment made, 
or both. The final assessment, however, is made 
by the fiscal officers. 

In the American commonwealths, the assessment 
of the general property tax is usually made by a 
board of locally elected assessors or an . 

J Assessment of 

assessor. The assessor calls for declara- the general 
tions from the different contributors. propert y tax - 
The law in most States imposes severe penalties 
for failure to comply with the requirement of dec- 
laration, or for false declaration. But, nevertheless, 
there is, for the most part (Pennsylvania is almost 
the only exception), the utmost laxity in enforcing 
the law concerning declarations. Only the unusu- 
ally conscientious, who voluntarily come forward 
with complete statements, are reached in this way. 
So general is the habit of neglecting this duty that 
it is practically impossible for the assessor, no matter 
how anxious he may be to have the law complied 



344 INTRODUCTION TO PUBLIC FINANCE part iv 

with, to prosecute all the persons whom he knows 
are evading assessment. The general practice is to 
Difficulty of default the declaration and allow the as- 
o taming sessor to find out if he can what taxable 

' declara- 
tions." property the contributor has. If this 

were done by only a few persons they could easily 
be brought to terms under the existing laws, but 
when nine-tenths of the population refuse to com- 
ply, the assessor is helpless, and the only effect 
that follows from the declaration by the few is to 
make the existing inequalities of the general prop- 
erty tax worse than ever. Real estate and other 
visible property is easily assessed. The officer has 
at his command the records of titles, of deeds, etc., 
which he can investigate, and he ascertains the 
value of each piece from his own personal observa- 
tion of prevailing prices. As we have seen, per- 
sonal, intangible property escapes almost entirely. 
It would seem that this difficulty of administration 
is insuperable. No merely severe methods of assess- 
ment will ever cure the evil. 

Above the assessor in the United States there are 
generally two boards of equalisation, though some- 
times only one. The first board is local, 

Equalisation. . 

covering the same district as the assessor. 
This hears appeal from the tax-payers in regard to 
their assessment. It equalises between individuals. 
The second board is for the whole commonwealth, 
and is known as the State Board of Equalisation. 
These boards are to adjust the burden of State 



chap, ii COLLECTION 345 

taxation equally between the different districts. 
As has already been explained, a local assessor may 
make the assessment in his district lower than that 
in the other districts. This will not affect the 
burden of local taxation, for all that is needed is 
to raise the rate. But it lessens, if the assessment 
stands, the burden which the State taxes impose. 
These central boards are of two kinds : (1) those 
with power to add to or subtract from the assess- 
ment of each district, but in such a way as not to 
change the total amount ; (2) those with power 
to change the assessment, even of the individuals," 
and which may and generally do change the total 
assessment of the State. As these boards seldom 
have sufficient powers, and never sufficient informa- 
tion as to the local conditions, the effect of their 
action is not all that could be desired. The only 
possible solution of this difficulty is the separation 
of local taxation from that of the commonwealths, 
so that the assessment can be made independently 
for each. 

Sec. 4. After the assessment has been completed, 
it is comparatively easy to make the collection. All 
that is needed is a collecting agent of the treasury 
conveniently located, to whom the tax -payers may 

go, Or a Collector who goes to the tax- Convenience 

payers. The burden of taxation may be °f the c °ntnb- 

. i . r i • <• utor t0 oe con - 

seriously increased it the convenience oi suited in 
the tax-payers is not consulted in this collection. 
matter. The size of the district over which a col- 



346 INTRODUCTION TO PUBLIC FINANCE part iv 

lector has supervision will depend upon the density 
of the population. If the collector is to be sought 
out by the contributors, it is best that his office 
should be located in some business centre fre- 
quently visited by the contributors. According to 
the principle of " certainty and convenience," the 
taxes assessed upon the same person should all 
be entered in a single bill and all be payable to the 
same collector. The tax-payer should be informed 
as early as possible of the total amount of taxes 
that he has to pay, of the number of instalments 
in which they are payable, and of the conditions of 
delinquency and its penalty. Some of the American 
commonwealths disregard this rule entirely. They 
add grievously to the burden of taxation, especially 
in the country districts, where they are already en- 
tirely out of proportion to the ability of the people, 
and increase the irritation felt by the contributors, 
by inconvenient location of the collectors' office, and 
by requiring the payment of State and county taxes 
to one set of collectors, while the town and other 
municipal taxes are paid to a different set and 
upon separate bills. The most economical and 
least irritating process is to have all the taxes 
collected by the same person. 1 

Sec. 5. The transfer of the public funds from one 

1 The writer knows of an instance where a farmer has to travel 
fifty miles to pay his State and county taxes, while the local taxes 
are collected within two miles of his home. This is not an ex- 
treme case. 



chap, ii CUSTODY OF FUNDS 347 

part of the country to another is, in modern times, 
attended with little risk. It is most conveniently 
done by means of the banks or the post Means of 
office. If the country is sparsely popu- transferring 

i.i i • ,i n » ,v> public money 

lated and insecure, the collectors office from place to 
should be at or near the bank or vault P*«ce. 
in which the money is to be stored. In large 
countries, as, for example, the United States, it is 
convenient to have a number of branch treasuries 
scattered about the country, at which collections can 
be made, and through which money for expenditure 
can be distributed to the disbursing officers. 1 

The storage or safe-keeping of the funds is accom- 
plished in one of three ways. (1) As in England, 
a great State Bank is made custodian of storage of the 
the funds which are sent to it from the public funds. 
various collectors who deposit with its branches. 
(2) As in France and the United States, the treas- 
ury and the sub-treasuries are the chief custodians 
of the funds. 2 (3) As in the commonwealths of the 
United States, where (except in Indiana, Ohio, Cali- 
fornia, Kansas, Mississippi, Nevada, and Texas) pri- 
vate or other banks are made the depositories of the 
public moneys. When protected by proper safe- 
guards, such as the giving of personal bonds and 

1 Sub-treasuries are at Baltimore, Boston, Chicago, Cincinnati, 
New Orleans, New York, Philadelphia, St. Louis, and San Fran- 
cisco. 

2 According to law, the Treasurer and disbursing officers of the 
United States may make deposits in the National Banks. About 
$14,000,000 are regularly so deposited. 



348 INTRODUCTION TO PUBLIC FINANCE part iv 

collateral, the bank depository system has proved 
itself far safer and more economical than the inde- 
pendent treasury, which is only to be defended on 
political grounds, if at all. The experience of the 
United States federal government in the early days 
with " pet banks " points to the political difficulties 
of the bank depository system. The bank deposit 
system prevents the periodic disturbance of the cir- 
culation by the withdrawal or storage of money. If 
the independent treasury system were used by all 
the departments of the government, this disturb- 
ance would undoubtedly be serious enough to affect 
prices. 1 

Sec. 6. The mere mechanical details of the 
methods of bookkeeping and public accounts can- 
not be described here. About all that can be done 
is to make such explanation as will enable the stu- 
dent to easily comprehend the published accounts 
and statistics in their main features. 

The revenue account is generally very simple. It 
contains items named according to the sources from 
which they come. Care must be taken 
accounts, in studying the reports of the fiscal offi- 
ng ls ' cers on the revenues to distinguish the 

receipts that represent income from the receipts that 
are merely formal transfers and bookkeeping expedi- 
ents. For example, the English finance account of 

1 Cf. Kinley's "Independent Treasury," and Buckley's "Cus- 
tody of State Funds," Annals of the American Academy, Vol. VI., 
3, November, 1895. 



chap, ii PUBLIC ACCOUNTS 349 

the United Kingdom for the year ending March 31, 
1895, contains the following : Receipts ; I. Balance 
in Exchequer, April 1, 1894, £5,977,118, 18s. 9d, 
II. Revenues received into the Exchequer ; viz., 
Customs, Excises, etc., £ 94,683, 762, 10s. 2d. ; total, 
£100,660,881, 8s. lid. This was what England had 
to draw on. But following that appear a number 
of other " Exchequer receipts," among which are re- 
payments of Advances, as, (1) by the mint for the 
purchase of bullion for coinage, £700,000, represent- 
ing merely a return to the Exchequer of money 
temporarily passed to the mint. The same year the 
Exchequer advanced to the mint £615,000, which 
will appear in 1896 as a receipt increased by the 
seigniorage. (2) The Exchequer borrows money 
temporarily in anticipation of the revenues. This 
appears, of course, as a receipt of £13,700,000, but is 
not revenue. (3) It renewed a number of outstand- 
ing bills and bonds amounting to £14,123,400. 
These appear as receipts, offset, of course, by an 
equal expenditure. But (4) it created an addi- 
tional debt of £760,000, for barracks and telegraph. 
This sum may fairly be called revenue. So that the 
total amount of money that came as actual income 
to the treasury was £101,420,881, 8s. lid. But the 
total receipts foot up £130,217,647, 13s. Sd. 

On the expenditure side, the Issues, or credits to 
disbursing officials, are first the Consolidated Fund 
"Services." That is, the payments for (1) the 
National Debt " Services," (2) the " other consoli- 



350 INTRODUCTION TO PUBLIC FINANCE part iv 

dated fund services," which consist of the civil list, 
annuities and pensions, salaries and allowances, courts 
of justice, miscellaneous " services," the Exchequer 
contributions to Ireland, and the annuity under 
the Indian Army Pension Deficiency act of 1885. 
After the consolidated fund " services," which foot 
up to £26,500,000, come the supply " services " for 
the army, ordinance factories, navy, and miscellane- 
ous civil " services," for the collection of customs 
and inland revenue, post office, telegraph, and postal 
packet "services." These two items, the consoli- 
dated fund and supply "services," contain all that 
is strictly chargeable to the revenue. They 
amounted in 1895 to £93,918,420, 18s. 4rf. In ad- 
dition there were special expenditures of £ 810,000, 
making a total of £94,728,420, 18s. 4c?. But there 
were a large number of additional issues: (1) bills 
and bonds paid off by receipts from new bills, (2) 
temporary advances repaid, a part of which were for 
deficiencies in the consolidated fund. These and 
one or two other minor items, with a balance of 
£6,300,826, 15s. 4i., brought the " Issues " up to the 
receipts. 

In studying the accounts published by the Treas- 
ury Department of the United States, we have dif- 
p ,j. ferent difficulties to meet. There is 

accounts, generally a clear statement, free from 

me a es ' repetitions, or transfers, of the revenues 
according to the sources, and of expenditures 
according to departments, or objects. The only 



chap, ii PUBLIC ACCOUNTS 351 

difficulties arise from the peculiar and arbitrary 
grouping of the expenditures. This comes from the 
illogical distribution of duties among the different 
departments already referred to. Some of the 
peculiarities are that the expenditure for the " civil 
establishment " includes foreign intercourse, public 
buildings, collecting the revenues, deficiency in 
postal revenues, rebate of tax on tobacco, refunding 
of direct taxes, French spoliation claims, District of 
Columbia, and similarly incongruous items. Those 
for the military establishment included rivers and 
harbours, forts, arsenals, and sea-coast defences. For 
the naval establishment included construction of new 
vessels, machinery, armament, equipment, and im- 
provement of navy yards. Expenses not otherwise 
classified are generally listed as expenses of the 
Treasury Department. 

Sec. 7. An interesting phase of public bookkeep- 
ing is the separation of accounts into funds. When 

Parliament voted a tax it Avas formerlv 

„ , '.. , , . The" funds." 

tor a definite purpose, and the plan was 

to reserve the whole of it for the proposed purpose. 
But the receipts and expenditures of these funds 
never exactly balanced, and simplicity finally re- 
quired that all should be turned into the consoli- 
dated fund. This method of bookkeeping is best ex- 
hibited to-day by the accounts of the commonwealths 
in the United States, although also used in national 
and municipal accounts to some extent. All the re- 
ceipts are distributed among various so-called "funds," 



352 INTRODUCTION TO PUBLIC FINANCE part iv 

or accounts, according to some prearranged plan. A 
separate account is kept of all receipts and expendi- 
tures belonging to each fund. With the exception 
of a few trust funds arranged to keep certain sums 
inviolate, these funds are, in effect, mere bookkeep- 
ing contrivances. With the exception of the Gen- 
eral Fund, which receives all the money not other- 
wise appropriated to special funds, each of these 
accounts generally bears the name of the expendi- 
ture met thereby, sometimes of the revenues supply- 
ing them. In some commonwealths the number of 
these funds is very large. 1 The accounts are some- 
times complicated by transfers from one fund to 
another, in which case they appear twice in the 
account, and frequently swell the apparent receipts 
enormously. 

Local budgets are necessarily determined by the 
frame of local government and the number of func- 
Locai tions performed by each. Thus in Eng- 

accounts. Ismd the public function to be performed 

constitutes the basis of local organisation, and until 
the recent reforms each local governing body had 
only one or two duties ; hence only one or two gen- 
eral accounts of expenditures, and one or two 
sources of income. But in America each local 
governing body generally has charge of all the 
local functions affecting a certain area, and may 
have as many expenditures and revenues as a com- 

1 See Seligman, " Finance Statistics of the American Common- 
wealths," Pub. Amer. Statistical Assoc. , December, 1889. 



chap, ii PUBLIC ACCOUNTS 358 

mon wealth, or even more. Here methods of 
accounting defy classification and frequently defy 
sensible interpretation, even by the officials in 
charge. There is a crying need for reform here in 
the direction of uniformity. 1 

1 See in this connection a form suggested for published reports 
of municipalities by Prof. H. B. Gardner, in the Pub. of the Amer. 
Statistical Assoc, June, 1889, and adopted, in part, by the Eleventh 
Census of the United States, as the basis of schedules and inquiries 
sent to the municipalities. 

2 a 



BRIEF BIBLIOGRAPHY FOR ADVANCED 
STUDENTS 

Adams, H. C. Public Debts. N.Y., 1887. 

Bastable, C. F. Public Finance, 2d ed. enl. Macmillan and 

Co., 1895. 
Cobden Club Essays. Local Government and Taxation. 

London and N.Y., 1875. 
Cohn, G. System der Nationaloekonomie, 2ter Band, Finanz- 

wissenschaft. Stuttgart, 1889. Partial Translation by 

Veblen, T. B. Chicago, 1895. [Economic Studies of the 

University of Chicago.] 
Cooley, T. M. Law of Taxation, 2d ed. enl. Chicago, 1886. 
Cossa, L. Primi elemente di scienza delle finanze, 3d ed. 

Milan, 1882. Translation by Horace White, with notes. 

N.Y. and London, 1891. 
Do well, S. History of Taxation and Taxes in England. 

4 Vols. 2d ed. London and N.Y., 1885. 
Ely, R. T. and Finley, J. H. Taxation in American States 

and Cities. N.Y., 1888. 
Goschen, G. J. Reports and Speeches on Local Taxes. Mac- 
millan and Co., 1872. 
Hock, C. F. von. Finanzen und die Finanzgeschichte der 

Vereinigten Staaten von Amerika. Stuttgart, 1867. 
Leroy-Beaulieu, P. Traite de la Science des Finances. 5eme 

ed. Paris, 1892. 
Marzano, F. Compendio di scienza delle finanze. 2d ed. 

Turin, 1887. 
McCulloch, J. R. Taxation and the Funding System. 3d 

ed. London, 1863. 
De Parieu, F. E. Traite des impots. 5 tomes. Paris, 1862. 

[First edition in five volumes better than the second in four, 

1866-7.] 

354 



BIBLIOGRAPHY FOR ADVANCED STUDENTS 355 

Rau, K. H. Gruudsatze der Finanzwissenschaft. 3d ed. 

Heidelberg, 1850. 
Roscher, W. System der Finanzwissenschaft. 3d ed. enl. 

Stuttgart, 1886. 
Say, L., Editor. Dictionnaire des finances. Paris, 1883-1892. 
Schonberg, G., Editor. Handbuch der National Oekonomie, 

3ter Band. Tubingen, 3d ed., 1890. 
Schwab, J. C. History of the New York Property Tax. 

American Economic Assoc, 1890. 
Seligman, E. R. A. Essays in Taxation. Macmillan and 

Co., 1895. 
Seligman, E. R. A. Finance Statistics of the American Com- 
monwealths. Boston, American Statistical Assoc, 1889. 
Seligman, E. R. A. Progressive Taxation in Theory and 

Practice. American Economic Assoc, 1894. 
Seligman, E. R. A. Shifting and Incidence of Taxation. 

American Economic Assoc, 1892. 
Stein, L. von. Lehrbuch der Finanzwissenschaft. 5te Auf- 

lage. Leipzig, 1885. 
Vignes, E. Traite des impots en France. 2 tomes. Paris, 

1880. 
Wagner, A. Finanzwissenschaft. Leipzig, Vol. I. 3d ed., 

1883; Vol. II. 2d ed., 1890; Vol. III., 1889. [Publication 

still continuing.] 
Wilson, A. J. The National Budget, the National Debt, 

Taxes and Rates. English Citizen Series. Macmillan 

and Co., 1882. 

OTHER BIBLIOGRAPHIES 

[Most of the larger treatises mentioned above contain numer- 
ous references and many bibliographies. The three following 
lists of books are easily available for English and American 
students.] 

White's translation of Cossa's Taxation. Pp. 181-193. 
Bowker and lies. Readers' Guide in Economic, Social and 

Political Science. Putnam, 1891. Pp. 66-73. 
Seligman's Essays in Taxation. Pp. 62, 63, and 263, 264. 



INDEX 



See 



33; 

88; 



Abatement, 239. 

Ability, 84, 141. See Faculty. 

Accounts, English, 348 ; local, 352 
United States, 350. 

Acquisition, 93. 

Activities of the State, 13. 
State. 

Adams, H. C, 6, 295 n. 

Administrative expenditure, 
conception of direct taxes, 
fees, 95, 263. 

Ad valorem, 191. See Customs. 

Aids, 71, 132. 

Alcoholic liquors, 175. See Li- 
censes. 

American tax system, 102ff. See 
General property tax. 

Amortisation. See Redemption. 

Ancient revenues, 69. See Greece 
and Rome. 

Annuities, 304. See Debts. 

Apportioned rate, 101 ; taxes, 94. 

Apportionment in France, 158. 

Aristotle, 17. 

Arizona, assessment in, 213. 

Army organisation, 44. 

Art, galleries, 50 ; of public finance, 
3. 

Ashley, W. J., 115 n. 

Assessment, 103, 213 ; of direct 
taxes, 342 ; of excises, 175 ; of 
general property tax, 210; in 
Mass., 213; in Mich., 217; in 
Mont., 213 ; in Nevada, 213 ; in N. 
M., 213; in N. Y., 212; in Ohio, 
213; in R. I., 217. See Valuation, 
Special assessment. 

Athens, 23. 

Athletic clubs, 11. 

Audit, 334-339. See Control. 



Banks, 347, 348. See Corporations. 

Base, 100. 

Bastable, 6, 10, 20 n., 27, 46, 92, 93, 

96 n., 182, 185, 240, 268, 296 n., 

330. 
Bede, 71, 126, 127. 
Beer, English tax on, 176 n. See 

Excises. 
Benefit theory, 83, 111-113. See 

Common benefit and Special 

benefit. 
Benevolences, 71, 134, 136. 
Besitz, 93. 
Betterment, 66, 95, 267. See Special 

assessment. 
Bibliography, 354. 
Bluntschli, 2 n. 
Boeckh, 23 n. 
Bonds, taxation of, 224. See 

Debts. 
Bounties, 59-61. 
British income tax, 239-242. 
Buckley, 348 n. 
Budget, 325-332. See Control and 

Audit. 
Buildings, public, 41, 42. 
Building tax, 153, 222, 255. 
Burgess, J. W., 18 n., 172 n. 

Cadastre, 103, 150, 217, 221. See 

Land tax. 
California, 164, 249. 
Cameralists, 4, 34. 
Canals, 46. 

Capitation, 129, 130. See Poll. 
Capitalisation of taxation, 167. 
Capital, taxation of, 222-226, 257. 
Carucage, 134. 
Census, U. S., 35, 108, 210. 
Certainty and convenience, 346. 



357 



358 



INDEX 



Charitable expenditure, 53, 54. See 

Poor relief. 
Charles the Bald, 123. 
China, 81. 
Church fees, 264. 
City. See Municipality. 
Civic housekeeping, 28. 
Civil list, 33. 
Civil war, cost of, 46 ; income tax, 

243. 
Classification, 10; of expenditure, 

27, 28 ; of debts, 298-301 ; fees, 

83, 94; of revenues, 69; of taxes, 

83, 85, 86. 
Class tax, 151. See Poll tax. 
Cohn, 6, 9n., 10, 28, 99, 110, 172 n., 

191, 199 n., 285, 294. 
Colbert, 129, 199. 
Collateral inheritance tax. See 

Inheritance tax. 
Collection, 37, 340-342. 
Colonial policy of England, 202; 

taxation, 117, 139-142. 
Columbia College Studies, 117 n., 

140, 141, 265. 
Commerce, 51. 
Commissioner of general land 

office, 335. 
Common benefit, 11-13, 15, 28, 83. 

See Benefit theory. 
Common penny, 126. 
Commonwealth legislatures, 40. 
Commutation, 70. 
Comparative method, 7. 
Compensatory theory, 120. 
Comptroller, 335. 
Compulsion, 22. 
Compulsory revenues, 76. 
Congress, cost of, 39 : finance com- 
mittees, 330. 
Consolidated fund, 349. 
Constitution of U. S., 241. 
Constitutionalism, 26, 71, 72. 
Consular service, 36. 
Consumption, 8; taxes, 93, 151, 

170. 
Contractual revenues, 79, 80. 
Contributions, voluntary, 71. 
Contribution des patents, 159. 



Control and Audit, English, 333. 

Control of private enterprise, 52 ; 
of the purse, 72. 

Convenience of tax-payer, 345. 

Conversion of debts, 314. 

Cooley, Judge T. M., 113. 

Corn law, 160, 195. 

Corporation taxes, 163, 216, 226. 

Corve'es, 131. 

Cost of collection, 37. 

Courts, 64, 261. See Supreme 
court. 

Court of claims, 336. 

Crane and Moses, 2 n. 

Credit, 281-288. See Debts. 

Criminals, 56. 

Crown, 26, 34. 

Customs duties, 103, 182 ff . ; reve- 
nue from, 188 ; fall on consumer, 
189; fall on foreigner, 190; fall 
on importer, 190; collection of, 
341 ; English, 134, 160, 193, 196 ; 
French, 199 ff.; German, 198; in- 
cidence of, 253; U. S., 201 ff. ; 
Virginia, 142. See Tariff. 

Customs union, 197. 

Danegeld, 132. 

Death duties, 162, 227. See Inheri- 
tance tax. 

Debts, public, classified, 298-301; 
conversion of, 314; payment of, 
315 ; economic effect of, 290 ; size 
of, 278, 279 ; of the treasury, 306. 
See Credit, Indebtedness. 

Declaration, 238, 344. 

Deductive method, 7. 

Defective classes, 14. 

Defence, 43. 

Deficiency bills, 333. 

Deficit financiering, 21, 281. See 
Debts. 

Definitions, 100 ; of public finance, 
1. 

Democracy, 22. 

Derivative revenues, 79. 

Dieme, 129, 131. 

Digressive rate, 101, 102. 

Diplomatic service, 36. 



INDEX 



359 



Direct taxes, 87-89 ; assessment of, 

342; consumption taxes, 170; 

French, 158. See Classification. 
Distribution, 145. 
Division, of labour, 23, 2-4 ; of the 

subject, 8. 
Domains, 25, 26, 70, 96. 
Dona, 71. 

Donative monies, 127. 
Door and window tax, French, 

159. See Window tax. 
Douglas, C. H. J., 141. 
Droit de patent, 160. 
Duties, 103. See Customs. 

Economic effect of public borrow- 
ing, 290. 

Economics, 1-3. 

Economic rent. See Single tax. 

Education, 48-50. 

Educational fees, 263. 

Eleventh census, U. S., 35, 108, 210. 

Elizabeth, 76. 

Ely, R. T., 73. 

Embargo, 203. 

Eminent domain, 82. 

English writers, 5; excises, 176 n. ; 
protective duties, 194; tax sys- 
tem, 160. See British Parlia- 
ment. 

Equalisation, 344. 

Erwerb, 93. 

Estimates, 328. 

Ethics, 8. 

Exchequer bills, 307. 

Excises, 103, 169 ff., 171, 172, 181; 
collection of, 342 ; etymology of, 
129 n. ; German, 173; incidence 
of, 253; in New York, 142. 

Exemption, 112, 124. 

Expansion of State functions, 19. 

Expediency, 12, 73. 

Expenditure, 5, 8 ; classified, 27 ff . ; 
constitutionally controlled, 26; 
evolution of, 31 ; early stages of, 
22; feudal, 25; forced, 20; for 
individuals, 53; limited by re- 
sources, 9; net, 33. See Con- 
sumption, taxes on. 



Export duties, 183. 
Expropriation, 82. 
Extravagance, 35. 

Faculty theory, 84, 115-120, 121, 
140; tax, 116. See Ability. 

Family tax, 90, 124. See Hearth 
tax. 

Farmers overtaxed in U. S., 255. 

Farming of taxes, 340. 

Federal taxation, 146. 

Fees, 78, 94, 259 ff.; administra- 
tive, 95, 263; church, 264; col- 
lection of, 262 ; development of, 
260; educational, 263; judicial 
and legal, 94, 261; postal, 269; 
for services to private indus- 
tries, 265. See Special assess- 
ments. 

Feudal dues, commuted, 124 ; a 
heavy burden, 125 ; French, 128 ; 
feudal expenditure and revenues, 
25, 70 ; taxation, 123, 124. 

Fifteenths and tenths, 135. 

Final incidence, 104. 

Fines and penalties, 82. 

Fiscal administration, 10, 326 ; 
year, 332. 

Five-twenties, 303. 

Floating debts, 293-295. 

France, 43. See French. 

Freedom, 18. 

Freeman, exempt, 124. 

Free trade, 203 (see Customs and 
protection) ; in land, 116. 

French customs duties, 89; direct 
taxes, 158; feudal dues, 128: 
revolution, 130 ; tax system, 157 ; 
tobacco monopoly, 99, 100. 

Fumage, 132. See Hearth tax. 

Functions of government, 6. See 
State. 

Funded debt, 293-295. 

Funds of account, 351. 

Gabelle, 132, 174. 
Galatin, 320. 
Gardner, H. B., 353 n. 
Geffcken, 48. 



360 



INDEX 



General property tax, 208-219; in- 
cidence, 254; Prussian, 155, 210; 
Swiss, 210; U. S., 163,211. 

George, Henry, 106-108. See Sin- 
gle tax. 

Germany, 43, 173. See Prussian. 

Gifts, 82. 

Gobelin, 275. 

Goodnow, 65. 

Government, functions of, 132. 
See State. 

Grand list, 100. 

Greece, expenditure in, 22, 23. 

Hall, Hubert, 193 n. 

Hamilton, A., 320. 

Hamilton, R., 318. 

Hearth tax, 90, 121, 132. 

Henry VIII., 75. 

Heriot, 227. 

Hidage, 133. 

Hill, J. A., 236. 

Historical method, 7. 

Hoffman, I. G., 2 n., 11 n. 

Hospitals, 57. 

House tax, 156, 161. See Building 

tax. 
Hussite wars, 126. 

Idaho, assessment in, 213. 

Ideal taxation, 110, 111. 

Import taxes. See Customs. 

Imposts, 103, 141. 

Impot fonder , 220; unique, 106. 

Incidence, 104, 248 ff. ; of building 
tax, 255 ; of capital tax, 257 ; of 
customs and excises, 253 ; of gen- 
eral property tax, 255 ; of land 
tax, 256 ; of personal property 
tax, 255. See Shifting. 

Income tax, 90, 91, 137; theory of 
and place in system, 232-235 ; 
British, 91, 161, 239-242; Prus- 
sian, 152, 236; socialistic, 107; 
U. S., 89, 242-247. See Personal 
taxes. 

Indebtedness. See Credit, Debts, 
Public Debts, Loans. 

Independent treasury, 348. 



Indigence, 54. 

Indirect taxes, 87, 88, 147. See 
Direct taxes and Classification 
of taxes. 

Individualism, 18. 

Induction, 7. 

Industrial organisation, 6; revolu- 
tion, 144. 

Industries, public, 66, 271, 274. 

Industry, public aid to, 51 ; tax, 
153, 159. 

Inheritance tax, 89, 227-230; 
American, 229; English, 162. 
See Death duties and succession. 

Injunctions, 65. 

Insane, 56. 

Insurance, 56, 299. See Corpora- 
tions. 

Interest on public debt, 305, 306. 

Internal improvements, 47. 

Internal peace, 46. 

Internal revenue, 103, 177-179. 

Irredeemable paper money, 297. 
See Credit. 

Issues, 349. 

Judicial and legal fees, 94. 
Justice, cost of, 64. 
Justification of taxation, 73, 83. 

Kaudtorowicz, 191. 
Keynes, 7 n. 
Kidd, 18 n. 
Kinley, 348 n. 
Knies, 282-28(5. 

Laissez-faire, 5. 

Land, free trade in, 150; public, 
271-273; tax, 124, 219-222; Eng- 
lish, 137 ; incidence, 256 ; Prus- 
sian, 150. See Real estate, Sin- 
gle tax. 

Law, John, 286. 

Legacy and succession duties, 228. 
See Inheritance tax and Death 
duties. 

Legal fees, 94, 262. 

Legislature, cost of, 38, 41. 

Leroy-Beaulieu, 6 n., 9 n., 296 n. 



INDEX 



361 



Levasseur, 200 n. 
Levy, J. H., 195 n. 

Lexis, W., 189. 

Libraries,: 50. 

Licenses, 95. See Alcoholic. 

Life insurance premiums exempt, 
242. 

Life-saving stations, 48. 

Light-houses, 48. 

Limitation of State functions, 21. 

Limited option debt, 303. 

List, F., 61. 

Loans, domestic and foreign, 291 ; 
forced and contractual, 296 ; pro- 
ductive, 307, 308. See Debts. 

Local councils, 40; debts, 292; 
taxes, English, 137, 162; Prus- 
sian, 156. 

Lottery loans, 305. 

Luxuries, excise on, 174. 

Magna charta, 135. 

Malchus, 11 n. 

Malthus, 54. 

Manufactures, public, 31, 67, 97, 

98, 271, 276. 
Market dues, 125. 
Marquardt, 24 n. 
Massachusetts, 213. 
Mayo-Smith, 201. 
McCulloch, 195 n. 
McKinley tariff, 206. 
McLeod, 283, 286, 287. 
Measure of taxation, 75, 83. 
Meat and meal tax, 156. 
Mercantile theory, 129. 
Method, 7. 
Mexico, 109. 
Michigan, 217. 
Mileage, 41. 

Military services commuted, 71. 
Mill, J. S., 185. 
Mines, 274. 

Minimum of subsistence, 84, 112. 
Miquel, 154. 
Moffett, 39. 
Monarchical State, 25. 
Money payments, 145. 
Monopoly prices, 97. 



Montana, 213. 

Morrill tariff, 204. 

Mortgage tax, 164, 225, 241, 249. 

Moses, B., 2 n. 

Municipal taxes, 128. 

Museums, 50. 

Napoleon III., 200. 

National debt services, 349. 

Navigation, 47 

Navy, 45. 

Nebenius, 282. 

Necker, 130. 

Negotiation of debt, 311, 312. 

Nevada, 213. 

New England land system, 141 ; 
taxes, 140. 

New Mexico, 213. 

New York, assessment in, 212; ex- 
cises, 142. 

Notary's fee, 262. 

Objections to general property tax, 

209. 
Objective taxes, 92. 
Octroi, 132, 157. 
Ohio, assessment in, 213, 217. 
Orders in council, 202. 
Organisation of the State, 19. 

Paper money, 297. 

Parliament, cost of, 40. 

Patriotic loans, 296 n. 

Payment of debts, 315 ; of interest, 
313. 

Penalties, 82. 

Pennsylvania, 213. 

Pensions, 58. 

Percentage taxes. See Propor- 
tioned taxes. 

Perpetual bonds, 302. 

Personal property in U. S., 211, 
217 ; tax, incidence of, 255. 

Personal tax, 90, 231 ff.; and 
dwelling tax, French, 159 ; Prus- 
sian, 151. See Poll tax, Class tax, 
Income tax. 

Pet banks, 348. 

Petitiones, 71. 



362 



INDEX 



Physiocrats, 5, 87, 106. 

Pitt's sinking fund, 317. 

Police, 46. 

Political equality, 146. 

Political science, 2. 

Poll tax, 90, 231; French, 129; 
Prussian, 151; shifting, 257; 
Virginia, 141. See Capitation. 

Poor law, English, 139. 

Poor rate, English, 75, 76, 138. 

Poor relief, 23, 55. 

Popular subscription, 311. 

Possession tax, 93. 

Postal fees, 269 ; surplus, 270. 

Poverty, 13, 54. 

Price, B., 317. 

Prices, 78, 96. 

Primary taxes, 93. 

Printing, public, 39, 40. 

Probate fees, 95. 

Productive agents taxed, 145 ; 
loans, 307, 308. 

Progressive rate, 101. See Income 
tax. 

Prohibition of exports and im- 
ports, 199. 

Property, landed, assessed accord- 
ing to annual yield, 116 ; and in- 
come tax, English, 161; taxes, 
90, 91 ; general, 208 ff. ; not gen- 
eral in U. S., 164. 

Proportioned rate, 101 ; taxes, 94. 

Protection, 59, 60, 63, 184, 185, 187. 
See Customs duties, Free trade. 

Prussian general property tax, 
210 ; income tax, 236-239 ; tax re- 
form, 149; tax system, 150-154. 
See Germany. 

Public credit, 14, 281, 288, 289. See 
Credit, Debts. 

Public debts, 14 ; forms, 293 ; ne- 
gotiation, 311 ; system of, 309. 

Public finance, defined, 1 ; a 
science, 1-3. 

Public industries, 31, 97, 98, 271, 
276. 

Public land, 271-273 ; property, 26. 

Quarantine, 57. 



Qimsi-debt, 297. 
Quit-rents, 140. 

Rate, 100. See Poor rate. 

Rau, 35 n., 87, 282. 

Real estate in U. S., 211-217 ; tax, 
French, 158. 

Real taxes, 91. 

Redemption of debt, 315-323. 

Reform, 10, 165. 

Register, 335, 338. 

Regressive rate, 102. 

Belief, 227. 

Religion, 15, 22. 

Rent charges, 124. See Single tax. 

Representative government, 72. 

Repressive effect of taxation, 109. 

Reserves, cash, 281. 

Revenue taxes, 93 ; duties, 184, 185. 
See Internal revenue. 

Revenues, classification of, 69 ; col- 
lection of, 340 ff . ; cost of, 37 : 
derivative, 79. 

Reversions, 82. 

Revolution, French, 130; indus- 
trial, 144. 

Rhode Island, 217. 

Ricardo, 112. 

Ripley, 140. 

Rivers and harbours, 47. 

Roads, 46. 

Roman army, 24 ; expenditure, 22- 
24 ; law, 123 ; taxes, 125. 

Roscher, 4 n., 21 n., 296 n. 

Rosewater, 265. 

Ross, 251 n., 319. 

Sacrifice theory, 84. 

Salable value of real estate, 116. 

Saladin tithe, 134. 

Salt tax, 179. See Gabelle. 

School fees, 263. 

Schwab, 142 n. 

Scutage, 133. 

Secondary taxes, 93. 

Seligman, E. R. A., 11, 76, 76 n., 78, 
84, 92, 95, 96 n., 121, 172 n., 201, 
217-219, 247, 252, 253, 266. 

Services, 349. 



INDEX 



363 



Sevres, 275. 

Sewage, 15. 

Shaw, 49 n. 

Sherwood, 283 n. 

Shifting, 104, 248 ff . ; cost of, 250 ; 
of customs and excises, 253 ; poll 
tax, 257. See Incidence. 

Shipgeld, 132. 

Single tax, 106-109. See George, 
Henry, Income tax, socialistic. 

Sinking fund, 316-323 ; of common- 
wealths, 323; Gala tin's, 320; of 
war debt, 322. See Kedemption 
of debt. 

Smith, Adam, 5, 46; classification 
of taxes, 92 ; canons of taxation, 
250, 251; funded and floating 
debts, 293, 294 ; on proportional 
taxation, 111. 

Smuggling, 192. 

Socialism, 18. 

Socialistic income tax, 107 ; theory 
of progression, 120. 

Spahr, 107 n., 108. 

Special assessments, 95, 265-269. 

Special benefit, 11-13, 28. 

Specific duties, 191. 

Springer v. U. S., 244, 245. 

Stamps for fees, 262. 

State, functions of, 17, 19 ; nature 
of, 17 ; an organism, 17 ; owner- 
ship of railroads, 3. See Govern- 
ment. 

Steadiness of revenues, 20. 

Stein, L. v., 81 n. ; on customs du- 
ties, 193; on budget, 325. 

Steuer, 71. 

Stoppage at source, 228. 

Storage of funds, 347. 

Stourm, 325. 

Sub-treasuries, 347. 

Subjective taxes, 92. 

Succession tax, 227. See Inheri- 
tance tax, Death duties. 

Sumner, 201 n. 

Superannuations, 59. 

Supply services, English, 350. 

Supreme court, 89 ; on income tax, 
244, 245. 



Surplus, 21. 

Switzerland, general property tax, 

210. 
System of taxation, 105. 

Taille, etymology of, 129 n., 130. 

Tallage, 129, 129 n., 133 ; of groats, 
135. 

Tariff, 182 ff . ; English, 193; 
French, 199, 201 ; German, 197 ; 
U. S., 201 ff . See Customs duties. 

Taussig, 201 n. 

Taxation by divided authorities, 
148; English writers on, 5; evo- 
lution of, 125; by faculty, 115- 
120 ; ideal, 110, 111 ; justification 
of, 83 ; measure of, 75, 83. See 
particular captions. 

Taxes, acquisition, 93; appor- 
tioned, 94; besitz, 93; classified, 
85,86; consumption, 93 ; defined, 
77 ; direct and indirect, Rau and 
Wagner, 87 ; early English, 132 ; 
eiwerb, 93 ; income, 90, 91 ; per- 
sons, 90 ; possession, 93 ; prop- 
erty, 90, 91; proportioned, 94; 
on revenue, 93; on verbrauch, 
93. See particular captions. 

Tax farmer, 340 ; list, 103; system, 
105, 110. 

Technical education, 49. 

Ten-forties, 303. 

Terminable annuities, 304. 

Thirteenths and fifteenths, 134. 

Tithes, French, 129. 

Tobacco monopoly, 3, 151, 179, 180. 

Tobacco tax, 175, 177 n., 178. 

Toll, 103. 

Training schools, 45. 

Transfer of funds, 346. 

Transit duties, 182. 

Treasury, notes, 307; department, 
335, 338. 

Turkish wars, 126. 

Twentieths, 129. 

Unearned increment, 98, 109. 
Unit of base, 100. 
Universities, 50, 263. 



364 



INDEX 



Valuation of property in U. S., 

211. 
Verbrauch, 93. 

Verein fur Socialpolitik, 202, 
Vermont, 100, 117, 217. 
Vignes, 129 n. 
Vingtieme, 129, 130. 
Virginia, 141, 142, 247. 
Voluntary contributions, 71. 

Wages taxes, 207. 

Wagner, A., 20 n., 87, 88 n., 126, 

128, 157, 236 n., 294, 295. 
Walker, F., 141. 



War, expenditure for, 22, 23, 45; 

tariff of U. S., 204. 
Water supply, 15, 97. 
Weather bureau, 48. 
West, Max, 227. 

Wilson, A. J., 46, 195 n., 240, 329. 
Wilson tariff, 206. 
Wilson, Woodrow, 2 n. 
Window tax, English, 161. 
Wood, F. A., 117 n., 140. 
Woolsey, 43. 
Wyoming, 213. 

Zollverein, 197. 



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